90 at 9, Jan 13 2009: Record Fed profit; China hikes bank reserve ratio

Alex Tarrant presents 90 at 9 in association with BNZ

The Washington Post is reporting the US Fed is set to announce a record profit in 2009, passing over US$45 billion to the US Treasury. The windfall comes after the Fed went on a buying spree of US government bonds, which it earned interest on. On the other side of the coin, the Fed only has to pay banks 0.25% for deposits held at the central bank. However, the Fed may make losses when it starts to sell the US bonds as it drains these stimulus funds from the economy by selling the bonds.

Stocks fell in the US in early trade after lower than expected earnings from Aluminium giant Alcoa, Bloomberg reports.

Chile will become the 31st member of the OECD, it was announced overnight. Chile will be the first South American country in the group.

An announcement from China sent commodity currencies lower overnight. The Chinese central bank said it will increase the bank reserve ratio requirement by 0.5%, meaning Chinese banks will have to hold more deposits in reserve instead of lending them out. Markets are picking China to lead global growth in 2010 and this caused a bit of a stir.

The New Zealand dollar initially fell by around 0.5 USc to 73.7 USc, although it has made some gains back toward 74 USc since 7am.

Finally, yesterday's NZIER business outlook report has bank economists still picking the Reserve Bank may have to hike the OCR slightly sooner than the middle of the year. Economists warned that the report indicated non-tradeable inflation may be about to rise again. As Westpac economists said:

The surprising element in the survey was the 2.5 percentage point jump in capacity utilisation - something that will worry the Reserve Bank. The Bank was counting on spare capacity built up during recession to dampen inflationary pressures. But the Q3 inflation figures were surprisingly strong, suggesting the recession had only pruned non-tradables inflation rather than clear-felling it. Now today's capacity utilisation figures suggest non-tradables inflation could soon be building again! The only caveat is that capacity utilisation was very volatile over the course of 2009, and we could see a large fall next quarter.

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• Alex Tarrant
• 90 at 9

[caveltor]

Altering the reserve ratio in no way limits the amount of credit a bank can extend.

Changes to any reserve requirements, costs, types of reserve etc serve only to regulate interest rates across the term structure and across risk levels.

[MrPhotodoc]

So the FED buys debt and makes money on it? Hey, I've got some I'd like to sell! Why can't the FED just pay off everyone's credit card debt and let's be done with it? Why drag this out any longer? Oh yeah, that would start the whole cycle of over consumption, the economy would overheat, bubbles would be created and we would be in another boom and bust cycle. I forgot.

[mulder9814]

Q: How can the Fed make a profit it its part of the US Govt?? A.ns. Because its a private central bank that gives $US to the Govt and charges them interest for this! Q. Why doesn't the US Govt make its own money and not pay interest on it to a private bank?? A: becasue the FED is SCAMMING Americans.