Monday, January 25, 2010

Goldman Sachs: Fed Should Not Raises Interest Rates (Disaster if They Do)

Business Insider reports that Goldman Sachs is saying that the Fed and Bernanke should NOT raise interest rates. Business insider's title is "Goldmans says it'll be a disaster if Bernanke raises rates")

Their points:

Jobless rate remains unchanged. "[...] Real GDP growth probably accelerated to nearly 6% (annualized) in the fourth quarter; despite December’s worse-than-expected payroll employment report, job losses have slowed sharply over the past year; the jobless rate has been essentially unchanged for the last three months; and the stock market is up more than 60% from the lows of March 2009."

Inflation is low. "But in our view, serious consideration of a true “exit”—i.e., not just an end to the Fed’s liquidity support and asset purchases but an actual tightening of monetary policy—is still highly premature. Not only is inflation already modestly below the Fed’s 1½%-2% target, but the level of activity is so far below its potential that strong growth for an extended period is needed before tightening becomes appropriate.[...]"

Banks are not profiting from low rates (really?). "For one thing, the benefit of a hike is highly uncertain. It is difficult to believe that much arbitrage is currently going on given how sharply discount window borrowings have fallen in recent months. [...] Moreover, most banks are currently able to obtain financing at rates well below 0.5% in the interbank market."

No need to drain liquidity. "We also are not sure that Fed officials will need to raise the discount rate in order to facilitate draining excess reserves. [...] Our own view is that the volume of excess reserves does not have important effects on the broad financial system and the economy, at least now that the payment of interest on reserves enables the FOMC to raise short-term interest rates without having to match the demand and supply of reserves. Moreover, even if Fed officials do introduce a term deposit facility that is priced attractively enough to mop up a significant share of the current $1 trillion excess, the rate on this facility would likely be well below 0.5% given the current slope of the yield curve. This would make arbitrage unattractive even without a higher discount rate."

Read whole story.

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