Strange monetary policy of the central banks

Publié le par Jean-Pierre Chevallier


Some central banks (Fed, ECB, Japan, Switzerland, etc.) recently injected cash on the markets. This monetary policy is strange because it is against the usual practices.
Indeed, the monetary policy of the central banks always consisted in intervening on the markets by purchases and sale of Treasury bills which they hold to ensure the liquidity of the banking structure necessary to its normal operation.
When trade banks sell Treasury bills at the central bank, they receive cash which is necessary for them.
When trade banks buy Treasury bills sold by the central bank, the liquidity of these trade banks decrease.
The open market policy is the base of the action of a central bank to control liquidity… as Milton Friedman in one of his last articles published in Wall Street Journal pointed out it.
However, the invitations to tender which were launched do not correspond to this type of monetary policy. Indeed, these central banks lent (and lend still) cash to the trade banks which gave in guarantee Treasury bills and other bonds for one very reduced duration, from 1 to 3 days only.
These measurements correctly do not solve the problems arising because refunding of these loans drain automatically and very quickly the liquidity of the trade banks, which accentuates finally the disorders.
These central banks act very awkwardly. Indeed, some times, they flood into the markets an excess of liquidity which made fall the day-to-day rates at 1% in United States on Friday 10 and at 0.05% on Tuesday 14 in Japan! In these two cases, these yields are far from the normal levels.
It would have been healthier and more judicious for the central banks… to follow a traditional monetary policy while intervening normally and pertinently on the markets by an orthodox monetary policy in order to ensure the requirements in liquidity for the trade banks.
While wanting to show that they act, but with against direction, their managers show finally that they do not control the situation, which is rather worrying.
Indeed, during these last years, the central banks should better have supervised the trade banks which distributed mortgages in an adventurous way.

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Thanks to this collapse that I announced, the rates start to return in their normal band from 4 to 4.5% in which they fluctuated of 2002 to 2005: the 2-year is already to 4.3% and the 10-year is at 4.7%. The neutral rate of the Fed is well around 4.25%.

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Figure 1: http://s3.archive-host.com/membres/up/2107676425/20070815US1FF2Y10Y06.gif

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Figure 2: http://s3.archive-host.com/membres/up/2107676425/20070815US2FF2Y10Y02.gif

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Alan Greenspan was right to say that the markets would correct… and that a recession is announced because of the errors of the monetary policies of the central banks!

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