On Mar 24, 2008, at 3:38 PM, Michael Pollak wrote:
> Krugman is saying: if it's not true -- if this is a structural spread
> between the two rates (based on the perception that bank reserves
> actually
> aren't as safe as treasuries) -- then no matter how much the Fed
> floods
> the market, they can't to push the treasury rate below zero. And
> if this
> spread persisted, the Fed rate would then be stuck at 1.75%.
But the Fed's target is 2.25%, meaning that they add and remove reserves in order to hit it. So there's no "problem" to solve or anomaly to explain. If the funds rate were persistently above their target, as it was for a while last fall, then there'd be something to talk about.