Re: Can the Fed set the long-rate?

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

>Basil Moore wrote:
>
>> William, Doug and Warren
>>
>>         The reason the 51 Accord became necessary was the Fed could no
>> longer hold the peg, without letting the money supply rip. People were
>> cashing in their gov.s at par for deposits, and there was no way the fed
>> could dissuade this, without raising rates and permitting bond values to fall.

Mosler:
>Cashing in govs for deposits does increase the money supply, as defined,but is
>there any economic effect?  It just means the banks act as intermediaries as they
>wind up holding the govs?  (all else equal)  So perhaps the Fed was concerned
>that if the public held short term deposits rather than longer term gov secs they
>would have a higher propensity to spend?
-----------
Why would the banks wind up holding the bonds?  Or to put it
differently, why would the banks be willing to pay the pegged
price for bonds that the public is eager to sell at that price?
It seems to me that the Fed itself would have to be the buyer, in
effect making a (one-way) market at the pegged price.  In other
words, as Basil has said, the money supply would rip.  Until the
public had sold to its satisfaction, the overnight rate would be
out of the Fed's control.  The choice then would be which to peg,
the overnight rate or the bond rate.

William