»
jjMcCoy
- Money & Banking #1
The Fed controls roughly 65% of the deposit base
of the private banking system. That is down from
95% as late as 1993.
The Fed controls setting of the Fed Funds rate
and the discount rate. It does not control bank
deposit rates.
The Fed has a decent handle on what effects FOMC
policy will have on M-1 and M-2. But since it
does not control a large portion of bank funding,
it must proceed with caution when it makes changes in policy.
The banking systems real estate loan portfolio
is by far the largest component of the system's
interest earning asset book.
Now that short term rates are rising, the Fed
must watch the system's real estate book
carefully. So far, real estate loan originations
are still rolling along nicely.
However, if housing slows enough to cause
mortgage lending to flatten out or contract,
banks may reduce funding activities, leading
to a liquidity squeeze in the system that would
distress the economy. Should housing slow enough,
the FOMC would have to step up quickly and
liquify the system since the economy is
running well below effective capacity while
the US budget deficit remains large.
Hence, Bernanke spoke of a possible pause in
the rate hiking process to assess the economy.
Commodity prices are a small but growing
component of the total US price structure.
If the housing market slows further, but
does not nosedive, the Fed will be free to
raise rates sharply for a while.
I would look for a nasty first half of 2007,
if commodity prices surge further if and when
the Fed pauses. The Fed Funds rate could rise
to 6-6.25% for awhile after a very tough off
year election is over.
Bank deposit rates are still too low to
foster much in the way of savings. The Fed
may address that again as well after the
election.
jj
