Fed May Not Have Figured How to Raise Rates

The central bank has had trouble controlling near-term borrowing costs since the 2008 financial crisis and has been experimenting with ways to do so. While its main new tool has enabled the Fed to exert more influence over money-market rates in the past year, strategists from Barclays Plc to Goldman Sachs Group Inc. say the program is too small to prevent rates from falling when officials want them to climb.

At issue is the Fed’s balance sheet, which has ballooned through its bond buying, leaving over $2 trillion in excess reserves in the banking system that may prove to be more difficult to siphon off than in the past. New methods are needed because the federal funds rate, long the central bank’s primary policy instrument, has ceased to be an effective means to guide short-term market rates.

“The likelihood that we are going to get through this without some form of accident is very small,” said James Camp, a fund manager at Eagle Asset Management in St. Petersburg, Florida, that has $31.2 billion in assets. “My concern is that the rate resetting higher is not very elegant and becomes sort of clumsy, with a series of fits and starts.”

Bloomberg

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