Brian or Toro..

Discussion in 'Economy' started by Paulie, Jan 22, 2009.

  1. Paulie
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    Paulie Platinum Member

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    The fed funds rate and LIBOR have been pretty stagnant at or around .10% for well over a month now, perhaps even longer, absent me checking the exact stats.

    Just this week they started to rise, both now sitting over .20%, which is a 10% increase in only a week, compared to more than a month of stagnation. Fed funds is almost at the high end of the target range.

    What can we make of this? Are banks starting to loosen up? Seems like a pretty abrupt rise all of a sudden.

    Thoughts?
     
    Last edited: Jan 22, 2009
  2. gonegolfin
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    gonegolfin Member

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    I do not consider these specific federal funds rate changes over the past week or so to be very significant. It just means that for a few days, reserve growth slowed or bank reserves actually declined. Around this time of year, the Fed usually drains some reserves from the system (reserves that were added during the Holiday Season). I am sure that with the sizeable upcoming treasury auctions, reserve growth will continue to head north. Meanwhile, the Fed is just getting rolling on the MBS purchase facility which is now adding to reserves.

    You cannot determine whether the banks are "loosening up or not" (I assume you mean lending or investing) by looking at the federal funds rate or changes in the levels of bank reserves. Only the Fed can create and destroy bank reserves.

    (Removed comment about bank lending possibly tightening in recent weeks as the changes shown in money supply were strictly seasonal. Accounting for this, money supply growth has been flat in recent weeks.)

    Brian
     
    Last edited: Jan 22, 2009
  3. Toro
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    3-Month LIBOR is around 1.12% and is now near the lowest levels since before the stock market began collapsing last fall. The TED Spread - which is the difference between LIBOR and Treasury rates - also is near pre-crash levels. Also, 2-year swap spreads are at the lowest levels since summer of 2007, with the exception of a few brief readings last January.

    This means that the high levels of fear we saw a few months back has come out of the market to a great extent. LIBOR is the rate at which banks lend to one another. At the height of the crisis, banks were charging extremely high rates because they were unsure whether or not they would be repaid since banks were unsure about the credit quality of the borrowing institution. The improvement in short-term rates is most likely due to the unprecedented guarantees the government have given the financial system.

    Are banks loosening up? Its hard to say. Anecdotally, things are still very tight but I am hearing and seeing that credit is beginning to loosen a little. It is loosening in the capital markets as the issuance of corporate bonds this month was at an eight-month high. Also, investment grade bond yields have come in by ~200 bps.

    The high yield bond ETF has rallied substantially off its lows though it has come off a bit the past few days.

    HYG: Summary for ISHARES IBOXX HY BD - Yahoo! Finance

    The investment grade bond ETF has also improved substantially.

    LQD: Summary for ISHARES GS $ INVESTO - Yahoo! Finance

    So credit markets are improving and liquidity is coming back into the market. However, its still tight.

    Here is a site with rate information.
    Economic Statistics | OANDA FXTrade InfoCenter
     
    Last edited: Jan 22, 2009
  4. Paulie
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    Paulie Platinum Member

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    Interesting that two posters who are very educated on the markets have a pretty differing opinion on what the rate increase ultimately signifies.

    I suppose it's probably because one is a bull and another is a bear.
     
  5. gonegolfin
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    gonegolfin Member

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    It has nothing to do with bull or bear. The slight increase in the federal funds rate simply means that some reserves are being removed from the system by the Fed. This is typical after the Holidays.


    Brian
     
  6. Paulie
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    Paulie Platinum Member

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    I understand that, but Toro seems to view it as somewhat of a positive indicator, regardless of how insignificant it may ultimately be. You don't. I just find it interesting, that's all. I happen to think it's because he's more of a bull.
     
  7. Toro
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    I agree with Brian. I don't think a tick upwards in the Fed funds rate is all that significant. What I do think is significant is that the rate is stable. A few months ago, it was violently changing, with rates as high as 7% and as low as 0.0625%. The decreasing volatility is another data point that fear, though still high, has declined.

    Also, I don't disagree with Brian all that much. He was commenting on the Federal Reserve system and its interaction with the banking system. I was commenting on the capital markets and the banking system. I have no reason to doubt Brian's conclusion.
     
  8. Paulie
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    Paulie Platinum Member

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    I never thought you doubted it, just that you saw a positive angle to it, and he didn't seem to.

    Between the both of you, I've literally learned a monumental amount of economic information since I've been here. There was no offense meant to either one of you here. It's just interesting to see how certain things are perceived by different people.
     
  9. Toro
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    Oh, don't worry. I wasn't even remotely offended. After being of forums for a few years, I'm no longer offended by derogatory language directed towards myself!
     
  10. gonegolfin
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    Hee hee. Me neither. I am no longer offended by derogatory language I use on myself.

    Brian
     

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