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Y2K Problem Unlikely To Sway Fed Monetary Policy

By Marjorie Olster

NEW YORK (Reuters) - The Year 2000 computer problem is baffling to begin with, so it's no surprise economists are all over the map on the question of how it will affect Federal Reserve monetary policy in coming months.

Some Fed-watchers say the so-called Y2K computer bug, while a major concern for the Fed in its role as the nation's banking supervisor, is a separate issue from monetary policy that will not affect interest rates.

Others contend the Fed's commitment to supplying ample liquidity to the financial system around year-end will keep the policy-makers from raising interest rates later this year even if the U.S. economy continues to chug along at a robust pace.

``The Fed sees it as a separate issue from monetary policy,'' said James Annable, director of economics at Bank One Corp. (NYSE:ONE - news) ''It is a big huge important issue that can't be remedied or treated with monetary policy,'' he added. ``It won't stand in the way (of rate changes). That is their feeling.''

Fed officials see Y2K as a time-limited problem while monetary policy is a long-term tool, he added.

The Y2K or millennium bug arises because many older computers record dates using only the last two digits of the year. If left uncorrected, such systems might mistake the year 2000 for 1900, generating errors or failures around Jan 1.

Although the Fed expects the banking system's computers to function normally through the transition, a host of other problems could arise related to the public's behavior.

One of the Fed's chief concerns is that masses of people might try to withdraw large sums of cash on the eve of the New Year, taxing banks' supplies of currency. Businesses may prefer to hold larger sums in cash because of uncertainty.

To maintain public confidence in the banking system it is crucial to meet increased demands for cash and credit.

Meanwhile banks may become more risk-averse, cutting back on loans to borrowers with less-than-stellar credit profiles.

Morgan Stanley Dean Witter chief economist Richard Berner said some Y2K effects have already been seen in the financial markets and the Fed may not have anticipated them so soon.

Corporations accelerated borrowing over the summer due partly to fears of Y2K disruptions.

The ``spread'' -- or interest rate differential -- between U.S. Treasuries on one hand and corporates, mortgages and emerging market debt widened to levels not seen since last fall's financial crisis.

If safety-craving investors flock to Treasuries toward year-end, rates on government bonds would fall and spreads could widen further.

If this move is extreme, such as during last fall's financial crisis, markets seize up and new debt issuers find it impossible to bring deals to market, causing a credit crunch. Credit Suisse First Boston chief economist Neal Soss maintains Y2K concerns will probably keep the Fed from raising interest rates again before the end of the year.

``During a period when the financial system will likely have a large preference for liquidity, safety, security and comfort, restraining liquidity (by raising rates) is precisely the wrong thing to do,'' Soss said.

But Fed Governor Edward Gramlich said in April the Fed would not be stop battling inflation in the face of Y2K.

``We won't be dissuaded from taking hard measures, if we feel we need to, because of Y2K,'' Gramlich said when asked if concern over Y2K computer problems may keep the Fed on hold.

The Fed made two back-to-back rate hikes in June and August to stave off inflation from tight labor markets, strong domestic demand and recovering economies overseas.

The minutes of the June 29-30 FOMC meeting, released Thursday, said the Fed anticipates the effects on economic activity from Y2K fallout would be ``limited or negligible'', adding somewhat to growth later this year and temporarily reducing growth next year.

``Unless markets turn disorderly, the Fed won't hesitate to raise interest rates because of anticipated problems associated with Y2K,'' Morgan Stanley's Berner said.

The Fed has set up a special loan facility to help banks handle any liquidity problems arising from the century date change -- increased demand for cash or credit, greater caution by lenders or depositors or potential market disruptions.

The Fed has not announced any cap on the facility which will be in effect from October 1, 1999 to April 7, 2000.

The arrangement allows commercial banks to borrow directly from the Fed against collateral at a rate 1.5 percentage points above the target federal funds rate, currently 5.25 percent.

The Y2K related-loans would have fewer restrictions on use and duration than borrowing from the Fed's discount window and banks would not need to seek funds elsewhere first.

Annable dubbed the loan facility a ``drive-through discount window'' because of the ease of obtaining funds. The last time the Fed was prepared to supply so much liquidity to the system was in the aftermath of the 1987 stock market crash, he said.

Separately, the Fed has asked the Treasury to print about $50 billion to meet any increased domestic demand, and $20 billion for international contingencies. Normally the Fed holds about $150 billion in reserve.

``The Fed sees this as a major test of their stewardship over financial markets,'' Annable said. ``They are going to provide the liquidity no matter what the fed funds rate is.''

(end)

-- Deborah (infowars@yahoo.com), August 31, 1999

Answers

The system is going to collapse. Yet, they can't make any major changes because that will cause a collapse, in itself. So all they can do is ride it out. They know what's coming as well -- better, perhaps, than we do. And they have private and tax-payer funded bunkers.

Your rulers have gotten away with a fraudulent, dishonest, manipulative, elite enriching, fragile money/credit/banking system for years, even prior to the establishment of the Federal Reserve System in 1913.

Withdraw early and often, and convert to real stuff.

-- A (A@AisA.com), August 31, 1999.