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

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.