fed in action Flashcards
conventional polict
influence AD by lowering/raising short term rates via OMO (pre 2008) or IOR (post 2008)
unconventional policy
seeks to influence AD by lowering/raising long term rates via QE, forward guidance
landing is
bringing inflation back down
soft landing
inflation stays down
hard landing
inflation goes back up after being brought down
refinancing mortagge
getting a new lower rate
-use money from new loan to pau old one, its better because new rate is lower
each interest rate decision by the FOMC is now accompnaied by what
a correspondong piece of forward guidnace
forward guidanc: taxiing january- december 2021
change is part of forward guidance piece. observation that inflation is about its target
december 2021 forward guidance taxiing is under the impression
that inflation is not gonna be a big problem
forward guidance takeoff january 2022
see that they are expecting to raise FFR soon
forward guidnace liftoff march 2022-may 2022
rasied rates and then they said they expected to keep raising rates.
-admitted they slept on inflation and have to raise it more than they would like
quantitative tightening
reducing large asset scale through sale or hold it till it falls off/loses value
what do QE and quantitative tightening help
help reduce gap between short and long term
cost of forward guidnace
it constrains the fed. what if it changes its mind. Lowk messes us up, so we get mad at the fed and trust them less
key channel through which fed can reign in inflation is by
tempering asset prices
why was there no such decline in 2004/2005
FFR wwas raised more slely and said rasies had hardly any impact on long term rates
balance sheet is liquid when
its money exceeds the value of its short term liabilities
when is a balace sheet solvent
if value of its assets exceed the value of its debt
is liquid short or long term, what about solvency
liquidity is short term measure of quality and solvency is long term
why do you need a liquid balance sheey
you need money to pay for debt, if not you go bankrupt
true or false every modern bank is illiquid
dont have money to pay deposits. duration of deposits is whenever you want
what do you use to determine if a bank is good or not
solvency
main way banks are financed is
deposist
why does fed lend to banks
for collateral
lender of last resort
protect solvent banks from going bankrupt
congress established the fed as a
lender of last resort
sillicon vallet bank
-fed raised interest rates
-market value of SVB assets falls whereas market value debt is unchanged
were SVB assets long or short term
assets were mostly long term, whereas most of its debt is short term
duration gap
differebc =e between average duration of assets vs average duration of liabilities
silicon valleys banks problem was that
they did not have enough money to pay deposits
second act for SVB
they planned a capital raise to strengthen liquidity + solvency
-issue and sell more stock to inc capital (no one liked this)
-within a day 20% of all deposits were withdrawn.
SVB third act
they end day with -1b in cash balances
-this is possible because they can have (-) reserve balance (day lighht over drafts)
why are withdrawls so much easier today
because it is online. info spread faster (twitter) then can withdraw money on the pheon
why is FDIC 250k deposit insurance insufficient to prevent runs
because evideintly some firms hoard hundred of millions in deposits (ie firms)
fed needs to be aware of
banks assets
what is an essential pillar of a smooth operating economy
commerical banking
parts of dodd frank act
1) liquidits regulation
2) capital regulation
3)volcker rule
+ deposit insurance
in response to the 2008 financial crisis congress put in place what
dodd frank act
liquidit regulation
increased liquidity requirements on asset side
capital regulation
increased capital requirements on the liability side
volcker rule
banks may no longer buy risjt assets on their own behalf
with dodd frank act depoit insreuance increased from 100k to
250k
