Fed Hopes Y2K Won't Get In Way Of Monetary Policy

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Fed Hopes Y2K Won't Get In Way Of Monetary Policy

Updated 4:14 PM ET October 4, 1999

By Marjorie Olster

NEW YORK (Reuters) - The Federal Reserve has gone to extraordinary lengths to avert Y2K-related financial market disruptions that could get in the way of making monetary policy in the final quarter of 1999.

Ahead of the first interest-rate setting meeting of the fourth quarter, Fed officials and an increasing number of Wall Street economists were betting year-end computer problems would not tie the central bank's hands and keep it from raising borrowing costs again if it deems inflation pressures strong enough.

"The Fed's goal is to try to neutralize Y2K as a policy constraint," said Richard Berner, chief economist at Morgan Stanley Dean Witter.

The policy-making Federal Open Market Committee (FOMC) meets Tuesday with Wall Street firms expecting no change in the key federal funds rate, which now stands at 5.25 percent.

Thirteen out of 30 primary dealers of government securities polled by Reuters last week expect the Fed to switch to a tightening bias, however, indicating it is leaning toward a rate increase as the next move.

The Fed says there is little danger of widespread computer failure in the banking system due to the Y2K millennium bug, which is expected to prevent some computers from distinguishing between 2000 and 1900 because of an old programming shortcut.

The Fed's primary concern is what chairman Alan Greenspan called a "fear-induced" reaction by corporations or individuals who could stockpile goods or demand excessive amounts of cash as year-end approaches. He warned that production bottlenecks could develop if firms build up inventories.

But mainly the Fed wants to ensure financial markets remain calm and interest rates on everything from corporate bonds to mortgages do not surge and disrupt credit markets.

The Fed has announced a series of measures to keep markets functioning smoothly and meet any demands for extra liquidity.

It has ordered printing of some $50 billion in extra cash to meet increased domestic demand and has also set up a special lending facility to help institutions that run into trouble.

Last month, the New York Fed announced it was expanding the collateral for open market operations beyond Treasuries to accept other types of securities until April 2000.

The Fed has assured the public it expects automatic teller machines, electronic money transfers and bank record-keeping to function normally around year-end and it urged the public not to draw large amounts of cash out of bank accounts.

Meanwhile, Fed governors and regional bank presidents have made clear Y2K concerns would not stand in the way of rate changes if demand-driven economic growth does not moderate.

"The Federal Reserve will remain prepared at all times, as it has in the past, to do whatever it deems to be necessary to have in place the best possible monetary policy," Governor Edward Kelley said in mid-September.

"That has traditionally been the case and we expect it always will be in the future, and that includes the next several months." New York Fed President William McDonough has said he does not anticipate a significant enough impact from Y2K on the economy or on markets to affect monetary policy in any way.

"I think what they are doing is setting it up so that the markets will not be surprised by a November 16 move," said David Orr, chief economist at First Union. After Tuesday's meeting, the FOMC next meets on November 16.

But some economists say raising rates in the coming months, which restrains liquidity, would be precisely the wrong thing to do at a time when the financial system will have a large preference for liquidity, safety, security and comfort.

Berner noted spreads, or interest rate differentials, between U.S. Treasuries and riskier debt securities have narrowed from late August peaks, probably due in part to the calming effect from the Fed's special Y2K liquidity measures.

A deluge of corporate supply in the summer, prompted partly by fears of liquidity problems around year-end, pushed spreads to their widest levels since fall of 1998 when U.S. credit markets seized up in response to the global financial crisis.

But in what some said was a sign of lingering Y2K anxiety, the three-month London Interbank Offered Rate (LIBOR) was set 57 basis points higher last week at about 6.08 percent to accommodate the century date turn.

Berner said he saw the sharp upward adjustment in LIBOR as a sign of "residual concern" over Y2K. "People are willing to pay up for liquidity."

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Ray

-- Ray (ray@totacc.com), October 04, 1999

Answers

Lets see now...

The Fed (along with lots of other governments around the world) has made it known that they are going to print up a lot of new money (Turn on the printing Presses). Now it is yet to be seen if M1 ...Mn (the real money supply) will actually increase, however when people figure out that they can just PRINT MORE MONEY any time they want to....

The gig may be up.... Hand in your GOLD! (Franklin Deleno Roosevelt).....

Things will get worse before they get better.

-- Helium (Heliumavid@yahoo.com), October 04, 1999.


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