Easy money??? Will Y2K concerns play a role in monetary policy?

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OK, I'm not qualified to comment, but from CNET News.com - Will Y2K concerns play a role... dated Aug. 28 <:)=

The Year 2000 computer problem is baffling to begin with, so it's no surprise economists are all over the map on the question of how it will affect Federal Reserve monetary policy in coming months.

Some Fed watchers say the so-called Y2K computer bug, while a major concern for the Fed in its role as the nation's banking supervisor, is a separate issue from monetary policy that will not affect interest rates.

Others contend the Fed's commitment to supplying ample liquidity to the financial system around year-end will keep the policy-makers from raising interest rates later this year even if the U.S. economy continues to chug along at a robust pace.

"The Fed sees it as a separate issue from monetary policy," said James Annable, director of economics at Bank One. "It is a big, huge important issue that can't be remedied or treated with monetary policy," he added. "It won't stand in the way [of rate changes]. That is their feeling."

Fed officials see Y2K as a time-limited problem while monetary policy is a long-term tool, he added.

The Y2K or millennium bug arises because many older computers record dates using only the last two digits of the year. If left uncorrected, such systems might mistake the year 2000 for 1900, generating errors or failures around January 1.

Although the Fed expects the banking system's computers to function normally through the transition, a host of other problems could arise related to the public's behavior.

One of the Fed's chief concerns is that masses of people might try to withdraw large sums of cash on the eve of the New Year, taxing banks' supplies of currency. Businesses may prefer to hold larger sums in cash because of uncertainty.

To maintain public confidence in the banking system it is crucial to meet increased demands for cash and credit.

Meanwhile banks may become more risk-averse, cutting back on loans to borrowers with less-than-stellar credit profiles.

Morgan Stanley Dean Witter chief economist Richard Berner said some Y2K effects have already been seen in the financial markets and the Fed may not have anticipated them.

Corporations accelerated borrowing over the summer due partly to fears of Y2K disruptions.

The "spread"--or interest rate differential--between U.S. Treasuries on one hand and corporates, mortgages, and emerging market debt widened to levels not seen since last fall's financial crisis.

If safety-craving investors flock to Treasuries toward year-end, rates on government bonds would fall and spreads could widen further.

If this move is extreme, such as during last fall's financial crisis, markets seize up and new debt issuers find it impossible to bring deals to market, causing a credit crunch. Credit Suisse First Boston chief economist Neal Soss maintains Y2K concerns will probably keep the Fed from raising interest rates again before the end of the year.

"During a period when the financial system will likely have a large preference for liquidity, safety, security, and comfort, restraining liquidity [by raising rates] is precisely the wrong thing to do," Soss said.

But Fed Governor Edward Gramlich said in April the Fed would not stop battling inflation in the face of Y2K.

"We won't be dissuaded from taking hard measures, if we feel we need to, because of Y2K," Gramlich said when asked if concern over Y2K computer problems may keep the Fed on hold.

The Fed made two back-to-back rate hikes in June and August to stave off inflation from tight labor markets, strong domestic demand, and recovering economies overseas.

The minutes of the June 29-30 FOMC meeting, released Thursday, said the Fed anticipates the effects on economic activity from Y2K fallout would be "limited or negligible," adding somewhat to growth later this year and temporarily reducing growth next year.

"Unless markets turn disorderly, the Fed won't hesitate to raise interest rates because of anticipated problems associated with Y2K," Morgan Stanley's Berner said.

The Fed has set up a special loan facility to help banks handle any liquidity problems arising from the century date change--increased demand for cash or credit, greater caution by lenders or depositors, or potential market disruptions.

The Fed has not announced any cap on the facility which will be in effect from October 1, 1999, to April 7, 2000.

The arrangement allows commercial banks to borrow directly from the Fed against collateral at a rate 1.5 percentage points above the target federal funds rate, currently 5.25 percent.

The Y2K related-loans would have fewer restrictions on use and duration than borrowing from the Fed's discount window and banks would not need to seek funds elsewhere first.

Annable dubbed the loan facility a "drive-through discount window" because of the ease of obtaining funds. The last time the Fed was prepared to supply so much liquidity to the system was in the aftermath of the 1987 stock market crash, he said.

Separately, the Fed has asked the Treasury to print about $50 billion to meet any increased domestic demand, and $20 billion for international contingencies. Normally the Fed holds about $150 billion in reserve.

"The Fed sees this as a major test of their stewardship over financial markets," Annable said. "They are going to provide the liquidity no matter what the fed funds rate is."

Story Copyright ) 1999 Reuters Limited. All rights reserved.

-- Sysman (y2kboard@yahoo.com), August 29, 1999


Rhetorical question if you ask me. Y2K is already playing a huge role in monetary policy. The Fed has made available more liquidity than ever before. While issuing all these wonderfully stern statments about strongly and forcefully intervening in the markets, they have been injecting liquidity over and over by using coupon passes. They have already remodeled the discount window to resemble the free and easy window. Understand that the credit facility that they have made available to banks toward the end of the year, knows no equal in the history of the markets. There is NO LIMIT. NONE. They can borrow as much as they need to borrow. A blank check.

Additionally, I put together some snipped comments from analysts following the last "increase" of 25 basis points for educational and research purposes:

> Economist John Ryding at Bear Stearns & Co. in New York said > the Fed has now accomplished that. ``We expect that this will be > the last interest rate increase this year. Inflation is too tame > for the Fed to push too far down the road of interest rate > hikes,'' Ryding said. > > > ``The discount rate is largely symbolic these days,'' said Robert > Bloom, president and portfolio manager of Friends, Ivory & Sime Inc. > ``But it (the discount rate increase) adds a little bit of emphasis to the fact that the Fed wants to stay ahead of the curve by >tightening.'' Bloom said there was only a ``slight chance'' that the Fed will raise interest rates again before the end of the year. > > A CNBC.com poll early last week found only one economist out of 10 > predicted another tightening between now and year-end. Stephen Slifer,chief U.S. economist at Lehman Brothers, says this remains the consensus view. > > Helping to foster the bond market's sanguine view about > Tuesday's Fed announcement was the perception that the central > bank might pause for a while, perhaps leaving rates alone for > the rest of this year. > In a Reuters poll of U.S. primary dealers -- the brokerage > firms that take part in Treasury auctions and open-market > operations with the Fed -- 25 of 28 said they did not expect > the Fed to raises rates again this year. > "The odds of another move over the next few months are > fairly low," said Nicholas Perna, chief economist at Fleet > Financial Group in Hartford, Conn. >

> > Aug 24 1999 5:59PM ET > > More on Economic Focus... > 15 of 20 Economists Say Fed Done for '99 > by Dean Patterson > Bonds Writer > A CNBC.com survey of 20 Wall Street economists right after the Fed's latest interest rate hike found that 15 of the 20 expect no more tightenings by our central bank this year. The remaining five predict one more quarter-point hike in 1999.

> U.S. Treasuries barely budge on Fed rate hike > *Bond prices rose moderately before announcement, briefly > firmed after it, then returned to pre-announcement levels. > *Fed rate hikes called aggressive, but said to signal end of > tightening. Funds rate hike was widely expected, priced in. > > "The spirit of this is very much neutral. The message is > that they are probably done for now. They don't expect to do > anything in October," said Jim O'Sullivan, economist J.P. > Morgan. >

> "Today's increase in the federal funds rate, together > with the policy action in June and the firming of > conditions more generally in U.S. financial markets > over recent months, should markedly diminish the > risk of rising inflation going forward," the Fed said in > a statement.

> "The markets are assuming that the Fed are > finished tightening for the year," said Sherry Cooper, > senior economist with brokerage Nesbitt Burns Inc. >

Yeah, I'd say the street is pretty sure that Y2K liquidity concerns will keep the FED calling plays till the end of the year. Their favorite play at the momement is the "Liquidity Sweep Right on Two, Hut 1, Hut 2.....

-- Gordon (g_gecko_69@hotmail.com), August 29, 1999.

It seem to me that the magnitude of market forces is increasing putting greater and greater pressure on the status quo.

Over extended credit and debts culminating in increased bank defaults is pulling us closer to a deflationary "Cash is King" economy.

Foreign liquidity demand, for example Japanese demand for Yen may result in selling their dollars to buy Yen. This putting downward pressure on the dollar value could increase the cost to the US for imports due to a weaker dollar.

The $50 billion or so liquidity boost by the Fed and similar actions by other central banks in their home markets are attempts to offset domestic Y2K banks runs for cash which could well be inflationary. The flight to quality with foreign investors putting money into US treasuries and blue chip stocks compounds the opposing monetary forces pulling our economy in different directions.

I read Mr. Greenspan's recent speech that central banks must include a wider number of variables for analysis before setting policy as a warning that it is becoming inveasing difficult to maintain business as usual and that volatility is increasing.

My two cents are out of stocks, and into some hard assets and some cash.

-- Bill P (porterwn@one.net), August 29, 1999.

A massive infusion of liquidity should lead to an equally massive inflation rate, especially if goods and services are restricted. (Basic economic theory).

-- Mad Monk (madmonk@hawaiian.net), August 29, 1999.

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