The Fed has already cut interest rates

[gonegolfin]

The Federal Reserve has essentially already cut its target interest rate for federal funds, despite not making an announcement of a new target rate. Federal funds have traded between 1.08% and 2.03% percent over the last nine trading days. The next high (after 2.03%) was 1.56%. Federal funds averaged 1.15% yesterday.

This means that since 9/19, the Fed has not been sterilizing all of its liquidity injections.

Brian

 

[dilloduck]

The Federal Reserve has essentially already cut its target interest rate for federal funds, despite not making an announcement of a new target rate. Federal funds have traded between 1.08% and 2.03% percent over the last nine trading days. The next high (after 2.03%) was 1.56%. Federal funds averaged 1.15% yesterday.

This means that since 9/19, the Fed has not been sterilizing all of its liquidity injections.

Brian

So the money spigot is still wide open ?

 

[gonegolfin]

So the money spigot is still wide open ?

It has opened a bit in the last couple of weeks (with the foreign currency swaps). It has been shut mostly for the last year as the Fed has been simply swapping good debt for bad debt, instead of injecting a bunch of net new liquidity. The monetary base has increased a little over 2% since August of '07.

We will know more when the first set of new TAF auctions are held. If the Fed does not sterilize this new $300 billion of injections, then we will know that the money spigot is wide open and you will see the monetary base take off.

Brian

 

[dilloduck]

It has opened a bit in the last couple of weeks (with the foreign currency swaps). It has been shut mostly for the last year as the Fed has been simply swapping good debt for bad debt, instead of injecting a bunch of net new liquidity. The monetary base has increased a little over 2% since August of '07.

We will know more when the first set of new TAF auctions are held. If the Fed does not sterilize this new $300 billion of injections, then we will know that the money spigot is wide open and you will see the monetary base take off.

Brian

explain 'sterilize', if you don't mind.

 

[gonegolfin]

explain 'sterilize', if you don't mind.

Let's say that the Fed loans $75 billion dollars at auction to a set of banks, in return for collateral accepted by the auction (I am using the Term Auction Facility as an example here). That collateral may be agency bonds (Fannie Mae, Freddie Mac debt) or it may be mortgage-backed securities, as an example. If this is all the Fed did, this injection of liquidity into the system (newly created money) would cause the federal funds rate drop. And it may drop below the Fed's target rate for federal funds. This is obviously inflationary.

So, the Fed sterilizes some or all of this injection (according to their goals with respect to the federal funds rate) by selling treasuries from their portfolio. When the Fed sells treasuries in the open market, money is removed from the money supply. This is obviously deflationary. Thus, the intent here is to offset some or all of the original liquidity injection(s) (sterilization). So, effectively, it is an indirect method of swapping treasuries for the above mentioned collateral. But I think that an unintended consequence of this is that the healthier banks (the ones that actually have some cash to lend) purchase the treasuries instead of lending into the economy (another example of government debt crowding out real economic investment). Meanwhile, the less healthy banks that took the cash loan in exchange for the collateral are the least likely to use this money for lending purposes. They may be using it to help stay solvent.

For most of the past year, the Fed has been piling up less credit-worthy assets on its balance sheet in exchange for much higher quality debt (treasuries). Thus, the Fed has taken on substantially much more credit risk.

Brian

 

[Toro]

There was tremendous volatility in the Fed funds market this week. The rate was rarely at 2% and ranged between 0.125% and 7%. It was amazing to watch it.

I wouldn't necessarily say the monetary spigot was open this week, given that swap spreads and the TED spread blew out to way above all-time highs. However, the Fed has expanded its balance sheet pretty dramatically, which will lead to more monetary creation down the road.

Money velocity is also slowing.

 

[dilloduck]

Let's say that the Fed loans $75 billion dollars at auction to a set of banks, in return for collateral accepted by the auction (I am using the Term Auction Facility as an example here). That collateral may be agency bonds (Fannie Mae, Freddie Mac debt) or it may be mortgage-backed securities, as an example. If this is all the Fed did, this injection of liquidity into the system (newly created money) would cause the federal funds rate drop. And it may drop below the Fed's target rate for federal funds. This is obviously inflationary.

So, the Fed sterilizes some or all of this injection (according to their goals with respect to the federal funds rate) by selling treasuries from their portfolio. When the Fed sells treasuries in the open market, money is removed from the money supply. This is obviously deflationary. Thus, the intent here is to offset some or all of the original liquidity injection(s) (sterilization). So, effectively, it is an indirect method of swapping treasuries for the above mentioned collateral. But I think that an unintended consequence of this is that the healthier banks (the ones that actually have some cash to lend) purchase the treasuries instead of lending into the economy (another example of government debt crowding out real economic investment). Meanwhile, the less healthy banks that took the cash loan in exchange for the collateral are the least likely to use this money for lending purposes. They may be using it to help stay solvent.

For most of the past year, the Fed has been piling up less credit-worthy assets on its balance sheet in exchange for much higher quality debt (treasuries). Thus, the Fed has taken on substantially much more credit risk.

Brian

and thereby making a financially riskier move with taxpayer money ?

 

[gonegolfin]

There was tremendous volatility in the Fed funds market this week. The rate was rarely at 2% and ranged between 0.125% and 7%. It was amazing to watch it.

I wouldn't necessarily say the monetary spigot was open this week, given that swap spreads and the TED spread blew out to way above all-time highs. However, the Fed has expanded its balance sheet pretty dramatically, which will lead to more monetary creation down the road.

Money velocity is also slowing.

Reserves expanded by about $91 billion in the week ended Wednesday (10/1). But most of the Fed balance sheet expansion was due to an expansion in the TSFP (Treasury Supplemental Financing Program), which is not inflationary as the Treasury is auctioning treasuries and depositing the proceeds with the Fed in a special Treasury account (on the liability side of the balance sheet). This has fooled a lot of folks in the press and media.

Brian

 

[gonegolfin]

and thereby making a financially riskier move with taxpayer money ?

Well, the Fed is swapping good debt for bad debt. This is obviously risky for our currency and our economy. But at the same time, the Treasury is issuing more debt (this does not even include the debt that will be auctioned to fund the bailout bill) and the Fed is using some of it to expand its balance sheet in a non-inflationary manner. Typically when the Fed expands its balance sheet, it does it by buying treasuries (increasing reserves as new money is spent to buy the treasuries).

Brian

 

[dilloduck]

Well, the Fed is swapping good debt for bad debt. This is obviously risky for our currency and our economy. But at the same time, the Treasury is issuing more debt (this does not even include the debt that will be auctioned to fund the bailout bill) and the Fed is using some of it to expand its balance sheet in a non-inflationary manner. Typically when the Fed expands its balance sheet, it does it by buying treasuries (increasing reserves as new money is spent to buy the treasuries).

Brian

Why does this sound like money laundering ?

 

[gonegolfin]

Why does this sound like money laundering ?

Brian

 

[editec]

There was tremendous volatility in the Fed funds market this week. The rate was rarely at 2% and ranged between 0.125% and 7%. It was amazing to watch it.

I wouldn't necessarily say the monetary spigot was open this week, given that swap spreads and the TED spread blew out to way above all-time highs. However, the Fed has expanded its balance sheet pretty dramatically, which will lead to more monetary creation down the road.

Money velocity is also slowing.

I wish my money's velosity was slowing down a bit.

My dollars are leaving my bank account so fast to compensate for that inflation (that isn't happening according to the government) that they're leaving little green burnout tracks on my passbook.

 

[Paulie]

I wish my money's velosity was slowing down a bit.

My dollars are leaving my bank account so fast to compensate for that inflation (that isn't happening according to the government) that they're leaving little green burnout tracks on my passbook.

You're confusing rising prices and increased money supply, in regards to inflation. Although prices have risen, it is not yet necessarily an inflationary scenario, in terms of money supply expansion. There may not necessarily be more money chasing a steady amount of goods, as of yet.

Have you been paying attention to Brian's postings?

If you have cash sitting around in an account, buy some gold and silver. It will make you feel much better when the inflation DOES set in.

 

[dilloduck]

You're confusing rising prices and increased money supply, in regards to inflation. Although prices have risen, it is not yet necessarily an inflationary scenario, in terms of money supply expansion.

Have you been paying attention to Brian's postings?

ya but if could speak down to me a little I would appreciate it.

 

[Paulie]

ya but if could speak down to me a little I would appreciate it.

If it seemed condescending, I apologize. It wasn't meant to be. I follow Austrian economics, and it tends to bother me when people confuse "inflation".

I love that you're hanging out in "Economy" more. I wish EVERYONE would get more interested.

 

[dilloduck]

If it seemed condescending, I apologize. It wasn't meant to be. I follow Austrian economics, and it tends to bother me when people confuse "inflation".

I love that you're hanging out in "Economy" more. I wish EVERYONE would get more interested.

no ---I seriously need to be talked down to on this --you guys are way over my head. I have no concept of how the Fed is involved in the cause or the solution of this mess.

 

[Paulie]

no ---I seriously need to be talked down to on this --you guys are way over my head. I have no concept of how the Fed is involved in the cause or the solution of this mess.

Well I learn more everyday. Brian has really helped me understand the behind the scenes policies that you'll never hear about on the news.

My advice would be to go to Ludwig von Mises Institute - Homepage and learn about Austrian Economics. That would be a great start.

EDIT: Oh, and the book Brian always suggests "The Creature From Jekyll Island", by G. Edward Griffin.

All about the Fed's origins.

 

[Toro]

You're confusing rising prices and increased money supply, in regards to inflation. Although prices have risen, it is not yet necessarily an inflationary scenario, in terms of money supply expansion. There may not necessarily be more money chasing a steady amount of goods, as of yet.

Have you been paying attention to Brian's postings?

If you have cash sitting around in an account, buy some gold and silver. It will make you feel much better when the inflation DOES set in.

Most people associate "inflation" with a general rise in prices.

As for gold, if you believe we are in a deflationary environment - and falling real estate prices, falling stock prices, recession and contracting credit are all deflationary - then gold will fall, as it has. Commodity prices have been the worst performing asset class the past month, falling farther than stocks. They have been killed.

I'm actively looking at shorting gold here. It looks like it is rolling over and on the way through $750.

 

[Paulie]

Most people associate "inflation" with a general rise in prices.

As for gold, if you believe we are in a deflationary environment - and falling real estate prices, falling stock prices, recession and contracting credit are all deflationary - then gold will fall, as it has. Commodity prices have been the worst performing asset class the past month, falling farther than stocks. They have been killed.

I'm actively looking at shorting gold here. It looks like it is rolling over and on the way through $750.

As much as I respect your economic opinions around here, I tend to disagree with you about precious metals. You are much more bullish than I am in regards to at least the short term future of the economy, and the Dollar specifically.

Indeed I do hope gold goes through $750, as I sure would love to average out some of my past purchases. Love to see silver dip below $10, as well.

Also, I tend to disagree about your outlook on gold in regards to possible deflationary situations, because I think this particular time we live in holds way too much uncertainty either way. I agree with Brian about the paper metals competing against the physical metals, which seems to be distorting the true price of PM's right now.

You simply can not go wrong with PM's. That of course, is my opinion.

 

[sealybobo]

Most people associate "inflation" with a general rise in prices.

As for gold, if you believe we are in a deflationary environment - and falling real estate prices, falling stock prices, recession and contracting credit are all deflationary - then gold will fall, as it has. Commodity prices have been the worst performing asset class the past month, falling farther than stocks. They have been killed.

I'm actively looking at shorting gold here. It looks like it is rolling over and on the way through $750.

As much as I respect your economic opinions around here, I tend to disagree with you about precious metals. You are much more bullish than I am in regards to at least the short term future of the economy, and the Dollar specifically.

Indeed I do hope gold goes through $750, as I sure would love to average out some of my past purchases. Love to see silver dip below $10, as well.

Also, I tend to disagree about your outlook on gold in regards to possible deflationary situations, because I think this particular time we live in holds way too much uncertainty either way. I agree with Brian about the paper metals competing against the physical metals, which seems to be distorting the true price of PM's right now.

You simply can not go wrong with PM's. That of course, is my opinion.

I remember Republicans said Obama's economy wasn't really good and the proof was that the Feds would not raise interest rates. Republicans said Obama won't take the training wheels off. Well why is this happening now then?

Fed Chairman Powell Hints At Interest Rate Cut; Stocks Rally

Stocks rallied Wednesday as Federal Reserve Chairman Jerome Powell testified about challenges the U.S. economy faces, adding to expectations that the central bank will cut interest rates later this month.

The Fed had hinted at such a cut in June.

Since then, "it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook,"

Who cause trade tension? TRUMP!

Stock indexes jumped by more than half a percentage point in the opening minutes of trading on the prospects that the Fed will cut rates for the first time since the Great Recession. The Dow Jones Industrial Average was up 150 points.

Powell stressed that the U.S. economy is still growing, albeit at a slower pace, as a record-long expansion begins its 11th year. But he cautioned that business investment has slowed, possibly as a response to ongoing trade tensions and a slowdown in the global economy.

Last week, the Labor Department reported stronger-than-expected job growth in June. But while unemployment remains at near-record lows, job growth has slowed since last year.

The Fed chairman also highlighted longer-term challenges, including high and rising federal debt and relatively low labor-force participation among Americans in their prime working years.

President Trump has repeatedly argued that the U.S. economy would be growing faster if the Fed lowered interest rates.

"If we had a Fed that would lower interest rates, we'd be like a rocket ship," he told reporters last week. "But we don't have a Fed that knows what they're doing."

Powell has stressed the importance for the Fed of maintaining its independence from political pressure.