TPS Posted September 18, 2019 Share Posted September 18, 2019 (edited) 1 hour ago, GG said: If always means once a decade, then I agree with you The "once a decade" that is going on currently is the repo market, not the FF market. The Fed is always operating (intervening) in the FF market because that is the target rate it manages. There is no debate about this. As I stated, because the Repo market is now more important for daily liquidity, (I guarantee) they will continue intervening in that market as well.. Edited September 18, 2019 by TPS Link to comment Share on other sites More sharing options...
GG Posted September 18, 2019 Author Share Posted September 18, 2019 14 minutes ago, TPS said: The "once a decade" that is going on currently is the repo market, not the FF market. The Fed is always operating (intervening) in the FF market because that is the target rate it manages. There is no debate about this. As I stated, because the Repo market is now more important for daily liquidity, (I guarantee) they will continue intervening in that market as well.. "Now" more important? How the hell do you think the majority of the market gets liquidity? Does Fidelity have access to the Fed window? Link to comment Share on other sites More sharing options...
TPS Posted September 18, 2019 Share Posted September 18, 2019 1 hour ago, GG said: "Now" more important? How the hell do you think the majority of the market gets liquidity? Does Fidelity have access to the Fed window? ...To the Fed's daily management of the payments system. Link to comment Share on other sites More sharing options...
TPS Posted September 18, 2019 Share Posted September 18, 2019 They should've listened to Bullard... https://www.bloomberg.com/news/articles/2019-09-18/u-s-federal-open-market-committee-sept-18-statement-text 1 Link to comment Share on other sites More sharing options...
GG Posted September 18, 2019 Author Share Posted September 18, 2019 47 minutes ago, TPS said: ...To the Fed's daily management of the payments system. But not the discount window, which Fed uses to control interest rates. Again, by going into the weeds, you ignore the forest where you think that Fed unilaterally controls interest rates. Link to comment Share on other sites More sharing options...
TPS Posted September 18, 2019 Share Posted September 18, 2019 32 minutes ago, GG said: But not the discount window, which Fed uses to control interest rates. Again, by going into the weeds, you ignore the forest where you think that Fed unilaterally controls interest rates. Whooo boy...You think the DW is the primary tool the Fed uses to control its interest rate target? It's called the Federal "Open Market" Committee for a reason... https://www.federalreserve.gov/monetarypolicy/openmarket.htm Quote Open Market Operations Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Before the global financial crisis, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC. The Fed buys/sells treasuries to manage the supply of reserves in the FF market--they controlled the supply curve in this market which allowed them to keep the rate within its target. Quote During the policy normalization process that commenced in December 2015, the Federal Reserve will use overnight reverse repurchase agreements (ON RRPs)--a type of OMO--as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC. Given the surplus of excess reserves post-2008, the Fed now must operate in the Repo market AND adjust the IOER to manage the FFR. As I said, the repo market is now more important in maintaining its FF target. Link to comment Share on other sites More sharing options...
GG Posted September 18, 2019 Author Share Posted September 18, 2019 4 hours ago, TPS said: Whooo boy...You think the DW is the primary tool the Fed uses to control its interest rate target? It's called the Federal "Open Market" Committee for a reason... https://www.federalreserve.gov/monetarypolicy/openmarket.htm The Fed buys/sells treasuries to manage the supply of reserves in the FF market--they controlled the supply curve in this market which allowed them to keep the rate within its target. Given the surplus of excess reserves post-2008, the Fed now must operate in the Repo market AND adjust the IOER to manage the FFR. As I said, the repo market is now more important in maintaining its FF target. Thanks for the text book explanations again, which don't explain why the repo market interest rates spiked 250 basis points above the Fed's target rates. Could it be that the market can operate independently of central banks and that real life interest rates are affected more by the markets? Link to comment Share on other sites More sharing options...
ALF Posted September 19, 2019 Share Posted September 19, 2019 Thank you to GG and TPS for your expertise explaining complex economic issues , seriously . 1 1 Link to comment Share on other sites More sharing options...
TPS Posted September 19, 2019 Share Posted September 19, 2019 (edited) 1 hour ago, GG said: Thanks for the text book explanations again, which don't explain why the repo market interest rates spiked 250 basis points above the Fed's target rates. Could it be that the market can operate independently of central banks and that real life interest rates are affected more by the markets? The explanations were from the Fed's website. Again, the Fed's target is the Fed Funds market, and the repo rate is typically tied to it via arbitrage. In the FF market, they control the supply curve, so they control the interest rate on a daily basis. That doesn't mean when there are significant demands for liquidity during periods (like this week with quarterly corp tax payments due), that there won't be spikes during the day. however, The Fed has unlimited power to inject reserves into the FF market. They have not committed to formally targeting the repo rate. In the largest financial markets in the world, there are going to be temporary hiccups. However, the Fed can supply unlimited funds to any other markets too--that's what they did in the crisis, and if they need to do it again, they can and will. Which is why they just threw $70 billion per day over the past two days at the repo markets. They also lowered the IOER to 1.8% which will cause banks to supply more funds into the repo market. To your main point: by markets, you mean supply and demand for funds. In the FF market, the Fed is the monopoly supplier of reserves, so it controls the supply curve, and therefore the interest rate in that market. If there is a spike during the day, it will use open market operations (buying treasuries) to inject more reserves to meet ANY demand. In other short markets, like repo, they do not explicitly control supply, so the whims of supply and demand can certainly influence daily rates--no disagreement here. However, most of the time the market is sufficiently liquid, so arbitrage ties the repo rate to the FF rate. This week, there were several factors putting undue demands on cash in the repo market, forcing the Fed to intervene there and supply enough funds to restore market liquidity. Can the repo rate spike from "the market"? Yes. Can the Fed bring the rate down to any level they desire? Yes. As they will do tomorrow... https://www.bloomberg.com/news/articles/2019-09-18/fed-plans-to-intervene-in-repo-market-for-a-third-straight-day?srnd=premium Quote The Federal Reserve made crystal clear that it doesn’t want U.S. money market rates to spike again like they did early this week, announcing it will -- for the third day in a row -- inject cash into this vital corner of finance. On Thursday, the New York Fed will offer up to $75 billion in a so-called overnight repurchase agreement operation, adding another dose of temporary liquidity to restore order in the banking system. It made the same offer Tuesday and Wednesday, deploying a tool it hadn’t used in a decade. This latest action follows the Fed’s reduction in the interest rate on excess reserves, or IOER, another attempt to quell money-market stresses. Quote “Though they didn’t announce a standing repo facility, what they did in essence is set up a ‘sitting’ one that can stand up when it needs to,” Hill said. “The market now knows the Fed will come in during stress conditions. So this will kind of operate in the pressure-valve way that was so needed.” Edited September 19, 2019 by TPS Link to comment Share on other sites More sharing options...
TPS Posted September 19, 2019 Share Posted September 19, 2019 Interesting Aspect on the Fed's response, or lack there of, that should put a smile on GG's face.... 1. The head of the Fed is an academic with no Wall Street experience. 2. Two senior officials overseeing the trading desk recently left and have not been replaced. bottom line: the Fed failed to react quickly on Monday to quell the turmoil. https://www.reuters.com/article/us-usa-fed-williams-analysis/repo-chaos-tests-wall-street-confidence-in-ny-feds-williams-idUSKBN1W333H Link to comment Share on other sites More sharing options...
TPS Posted September 19, 2019 Share Posted September 19, 2019 Here's a good piece from the WSJ today about bank reserves. Anyone following the previous debate between me and GG might find a lot of it very familiar....In fact, it almost sounds like the writer was following that discussion.. https://www.wsj.com/articles/bank-reserves-what-are-they-and-why-a-shortage-is-roiling-a-key-interest-rate-11568891110?mod=hp_lead_pos5 1 Link to comment Share on other sites More sharing options...
B-Man Posted September 20, 2019 Share Posted September 20, 2019 My entry into the TPS - GG economic discussion........................ 2 1 Link to comment Share on other sites More sharing options...
Foxx Posted September 21, 2019 Share Posted September 21, 2019 look for QE to resume shortly. Link to comment Share on other sites More sharing options...
3rdnlng Posted September 21, 2019 Share Posted September 21, 2019 On 9/19/2019 at 10:46 PM, B-Man said: My entry into the TPS - GG economic discussion........................ So, what with the tariffs, she's going to have to pay me? Link to comment Share on other sites More sharing options...
Chef Jim Posted September 21, 2019 Share Posted September 21, 2019 On 9/19/2019 at 7:46 PM, B-Man said: My entry into the TPS - GG economic discussion........................ Who’s the one with the ? reply???? Oh..... never mind Link to comment Share on other sites More sharing options...
TPS Posted September 21, 2019 Share Posted September 21, 2019 2 hours ago, Foxx said: look for QE to resume shortly. As I've said here many times, there is no economic reason for the Fed to reduce its balance sheet, it's a philosophical issue related to intervening in markets. Yes, the Fed will have to start expanding again, for many reasons. Link to comment Share on other sites More sharing options...
OldTimeAFLGuy Posted September 21, 2019 Share Posted September 21, 2019 On 9/19/2019 at 10:46 PM, B-Man said: My entry into the TPS - GG economic discussion........................ ...with this being a PG-13 site, better leave "your entry" right there........... Link to comment Share on other sites More sharing options...
Deranged Rhino Posted September 21, 2019 Share Posted September 21, 2019 1 Link to comment Share on other sites More sharing options...
TPS Posted September 21, 2019 Share Posted September 21, 2019 A good piece on the recent repo madness by former NY Fed president Dudley: https://www.bloomberg.com/opinion/articles/2019-09-20/how-the-fed-can-handle-the-repo-market Quote One of the world’s most important interest rates has had a tumultuous week. Thanks to a sudden shortage of dollars in a separate market, the federal funds rate – the focal point of the U.S. Federal Reserve’s monetary policy – briefly breached the 2%-to-2.25% range that the central bank was targeting. The aberration has generated a lot of concern. My advice: Don’t worry, the Fed can handle it. Link to comment Share on other sites More sharing options...
TPS Posted September 21, 2019 Share Posted September 21, 2019 1 minute ago, Deranged Rhino said: This (faster wage growth) happens when unemployment is "allowed to" stay low. If wages accelerate too much (leading to higher costs and prices), then the Fed will resume increasing interest rates which will bring on that next recession, ending those gains. That's how the system has functioned for the past 50 years or so. It's the Fed's responsibility to check inflation, and they do so by causing a recession to reduce wage pressures. So, while higher wages may be the cure, the disease will eventually be inflicted back on workers.... 1 Link to comment Share on other sites More sharing options...
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