Normalization of interest rates will not end Fed’s headaches – Nomura

Richard Koo, Chief Economist at Nomura, suggests that as the Fed normalizes interest rates, it will also have to pay even higher interest on the $2.3trn in excess reserves.

Key Quotes

“Those payments will eventually be borne entirely by taxpayers in the form of reduced Fed remittances to the Treasury (and an increased federal deficit).

I suspect the Fed will need to drain these funds before interest rates go too high and this becomes a major political issue.

So in addition to rate hikes and the anticipated market turmoil, there is also the issue of how and when the US central bank will mop up the excess liquidity in the system. The conflict between authorities and the markets is therefore likely to continue for an extended period of time.”