The Fed’s new term-deposit tool is politically risky

December 29, 2009

OK, so Ben Bernanke has cooked up a new idea to remove liquidity from the financial system,  a term-deposit program that would allow banks to park cash at the Fed. It would be like a CD of various maturities for banks. But there are some political risks here for Bernanke & Co. given the current high level of anti-Fed sentiment in Washington and in the rest of the country. First, the Fed could be accused of contributing to the freeze in small-biz lending by giving banks something else to do with their money.

Second, as analyst Jaret Seiberg of Concept Capital’s Washington research group notes,  the Fed would pay banks an interest rate that’s higher than the rate paid for simply keeping reserves at the central bank. “This is cash that could have otherwise gone to the Treasury Department. We see how some could portray this as another bailout or taxpayer subsidy for the banking industry.”

In other words, this gives the anti-Fed folks a bit more ammo when BB’s nomination comes up for a full Senate vote next month. As it is,  the Fed chairman will probably get at least 50 percent more “no” votes than any of his predecessors.

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