Federal Reserve Easing

In October 2014, the Federal Reserve ended the last of the Quantitative Easing (QE) programs. Speculation began immediately as to when targeted interest rates would be increased. While this kind of speculation is fine, let’s back up a minute because I think this is premature.

Just because the Federal Reserve stopped purchases of bonds in the open market doesn’t mean the extraordinary measures of QE are over. It does mean the the reserves maintained by the Fed have ceased growing. I keep track of the easing program on the Analytical Road website. Total reserves are just over $2.7 trillion. The amount required is $85 million. The gap between the two is the amount of easing needed to be worked off the balance sheet of the Fed.

You can see on the chart the amount has decreased for two months after peaking in August 2014. This decrease should have the same impact as increasing interest rates. I use the word “should” because it has been the contention of the Fed that bond purchases in the open market have acted as if they have continued to lower their interest rate target. Thus, it follows the opposite should also be true. If the reserve balances held continue to decrease and the Fed signals they will be raising their interest rate target, it would be the equivalent of a larger than expected increase. In other words, it would be a much larger shock to the economy than if interest rates were raised in a normal reserve balance environment.

Current speculation varies between an increase in interest rates during 2015 or waiting until 2016. Given the rate of decrease in the reserve balances, it seems like 2016 is a better plan. Personally, I am highly opposed to the current financial repression imposed by the Fed, I would advocate leaving the reserve balance at the current level and increasing targeted interest rates immediately. I know there is pressure from other central banks for us not to follow this path, but those wishes are opposed by the domestic interests of citizens who cannot reach their financial goals in this environment. There needs to be a voice advocating for an end to financial repression. I’m waiting to see who steps up and takes this idea. I suppose after waiting as long as I have, it is time to realize that I might need to become that voice.


Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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