The Federal Reserve Bank of Cleveland today detailed a longstanding Federal Reserve problem with the GSEs: the ability of the GSES, especially the FHLBs, to fuel foreign-bank excess reserves in ways that undercut the floor sought by the central bank for monetary-policy purposes. This – combined in our view with other monetary-policy challenges due to the post-crisis framework – has significantly impaired monetary-policy transmission. One might assume that a permeable floor would make policy ultra-accommodative and thus spur growth. However, because the floor is weakened by foreign-bank arbitrage activities, the net effect is at best nil for growth and at worst a further drag because still fewer funds are put into productive assets.
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