Today, we had the privilege of listening to William Dudley, president of the New York Fed. Almost everyone had QE-2 on their mind, and asked him questions on it, to which, he gave understandably evasive answers. I think it would have been a lot more fun had he, say, countered the points that Hussman makes in his latest newsletter. He did say one thing that Krugman and ilk would likely be miffed at–“We can manage much larger balance sheets.”
He did say another very interesting thing. He mentioned that interest paid by the Fed to banks on the excess reserves has become an important monetary tool, and very few people consider it to be so. He also mentioned that Fed got this power only in Fall 2008. See related press releases: Oct 6th, 2008, and Nov 5th, 2008.
This takes the total monetary levers to 5—the three usual suspects (Fed funds rate, discount rate, and reserve ratio), Fed balance sheet (represented by the infamous magma chart), and interest paid of reserves.
Prasad Capital 