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Fed Loses Control of its Benchmark Interest: Repo Rates through the Roof!

The Great Recession

Well, that didn’t take long! Four days ago, I stated the following in an article titled “Why are Bonds Going for Broke?“:

Central banks are losing control, and are admitting they don’t even understand what is happening.  

I quoted St. Louis Reserve Bank president, James Bullard, who commented

Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing…. We just have to stop thinking that next year things are going to be normal.”

There is an awful lot of thinking about the need to rethink the way they think in that statement from which I concluded,

The [central] banks appear to be losing control of interest rates and to be, themselves, controlled by market forces they can no longer contain or fully manipulate.

I noted that reserve bank presidents who say things like “something is going on” do not instill confidence that the Fed knows what is going on or how to deal with it, especially when they add that the Fed is “rethinking” how it thinks things work. I suggested the large swings in the bond market this month may be related to problems developing concurrently in our financial underpinnings, now showing up as massive cracks on the surface of the economy all around the economy’s fundamental interest rate. That’s not good.

Even Wall St. now agrees: The Federal Reserve Bank of New York delivered major jolts of evidence this week that the Fed is, in fact, losing control over interest rates.

[For anyone who doesn’t understand how the Fed governs interest rates via repurchase agreements, I wrote the following article as a companion to this one: “BOND PRIMER: How the Fed’s Machinery Works.” You may want to read it first and then come back here.]

Fractures in the system cracked wide open this week

At its last meeting, the Fed’s FOMC, which sets interest policy, downshifted its Interest-on-Excess-Reserves gear by lowering the interest it pays banks on their excess reserves. The IOER both entices banks to maintain excess reserves by paying higher interest on the excess than on the mandatory reserves, and sets an effective floor on bank overnight loan interest by establishing a rate the Fed will pay to keep that money in reserves. Banks have no reason to loan their excess reserves to each other for less than that rate because they can get totally secure interest from the Fed at that rate.

Dropping that rate last week accomplished absolutely nothing because banks were already lending well above that rate! An exercise in futility at this point. I suppose the Fed thought lowering the interest it pays on excess reserves would encourage banks to get flush out some of their excess reserves by loaning them to other banks, but that only works if there actually is enough money in excess to make a dent. Apparently there was not.

Throughout the first half of this year, the Fed Funds Rate set a target range for overnight loans of 2.25-2.50% (set at its December 2018 meeting as its last rate increase), and the effective rate for loans cruised smoothly along the IOER floor. (See chart below where “Effective Fed Funds Rate” means the median overnight loan rate that actually happens, not just the stated target.) By late March the effective rate began to bounce above its floor. A hint of a problem but not an actual problem so long as the effective rates stays within the target range, but it shows pressure building toward the top of the range, versus a smooth ride along the Fed’s floor. By May it was spiking fairly erratically.

At the end of July, The Fed reset the Fed Funds Rate lower to 2.0-2.25%, and it lowered the floor rate by which I don’t mean the bottom of the Fed’s stated range, but the IOER it sets, which banks are not inclined to loan below. Rates settled down a little but stayed above the IOER. Then on Tuesday of last week, while the Fed’s target range was still 2.0-2.25%, the overnight interest banks charge each other rose above that to 2.3%. During its subsequent FOMC meeting, the Fed lowered its target to a 1.75-2.0% range, but what meaning does that have if the effective rate is already above the old target? For the rest of the week, the effective overnight interest rate kept bursting above the Fed’s bounds, raising questions all over Wall Street about whether or not the Fed had lost its ability to establish interest rates, even at the most foundational level! At one point, the rate went astronomically higher, skyrocketing to 10%!

Read the rest here: The Great Recession

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5 Responses to Fed Loses Control of its Benchmark Interest: Repo Rates through the Roof!

  1. KOYOTE says:

    THE “FED” IS AN UNLAWFUL ENTITY.
    MARK MY WORDS…. WHEN WE START TAKING THIS BACK THE ASSHOLES THAT ARE LEFT WILL START TRYING TO HOARD AMERICAN RESOURCES, HIDING THEM. THEY WILL CRASH ALL FORMS OF GOVERNMENT PAYOUTS TO THE PEOPLE, SS PAYMENTS, DISABILITY, ETC. AND WILL TRY SHIFTING THE BLAME ON US, THE FREE AMERICANS.
    HERE IS THE QUESTION I WANT YOU TO POSE FOR YOURSELF;
    WILL YOU GIVE UP YOUR FREEDOM FOR A FEW SLIPS OF GREEN PAPER/ OR WILL YOU STAND BEHIND THE BILL OF RIGHTS?
    YOU CANNOT “SELL” WHAT ISNT YOURS TO SELL…. THUS THE WORD “UN-A-LIEN-ABLE”. “STRADDLING THE FENCE”, WILL BE DANGEROUS AS HELL DURING THIS TIME, WHEN OUR COURTS BEGIN TO REAPPEAR, AND THE LAW AGAINST “TREASON, SEDITION, AND INSURRECTION” WILL BE REINSTATED BY THE COMMON LAW JURIES………….

    Definition of treason
    1: the offense of attempting by overt acts to overthrow the government of the state to which the offender owes allegiance or to kill or personally injure the sovereign or the sovereign’s family
    2: the betrayal of a trust : TREACHERY

    Definition of sedition
    : incitement of resistance to or insurrection against lawful authority

    Definition of insurrection
    : an act or instance of revolting against civil authority or an established government.

    THE UNIFORM COMMERCIAL CODE IS UNLAWFUL IN THE US.

    “CASE LAW” IS UNLAWFUL IN THE US

    SO IS “SPYING” ON THE PEOPLE;

    Definition of espionage
    : the practice of spying or using spies to obtain information about the plans and activities especially of a foreign government or a competing company

  2. KOYOTE says:

    In repurchase agreements that happen outside the Fed, one entity approaches another saying, “I will sell you this security that I own now for this much money, and then I will purchase it back at a set date for the same price plus some interest.” It’s called a “repurchase agreement” because the seller of the security is obligating itself in its offer of sale to buy the security back at a set date and price… LIKE A PAWN SHOP OPERATES.

    Such agreements can be transacted through an auction where the contract is offered to many entities, and the price is determined by bid on the open market with the offered interest added into the repayment amount. So, the interest is set in the offering, but the price someone will pay to get that interest over that term is determined by auction. When it is initiated in reverse — someone offering to buy a security and then promising to sell it back on a set date at a set price, it’s called a “reverse repo.”

    There are two key differences when such agreements are carried out by the NY Fed. The first key difference is the creation of money. To implement the FOMC’s target rate, the NY Reserve Bank, says to its primary treasury dealers (a select group of large banks — currently there are fifteen — that are authorized to buy bills, notes and bonds directly from the US treasury via their NY Fed accounts), in essence, “We will buy securities from you and will create money in your reserve account out of thin air in the amount of those securities’ open-market value; then at a set time, you will buy them all back from us, and we will deduct that same amount of money back out of your reserve account, evaporating it back into thin air.” That set time is typically twenty-four hours later. One of the requirements for being a primary treasury dealer is that dealer banks have to participate in these arrangement when the Fed says they have to.

    The second key difference is that, whether it is called a “repo” or a “reverse repo” is stated from the perspective of the primary dealer. While the Federal Reserve Bank of New York in essence initiates the action by announcing its intent to buy securities and sell them back at a set date, that is merely an offering of intent. It then waits (seconds or minutes) for banks to auction repo agreements to raise the overnight cash they actually need. Thus, the primary dealers auction what they need on the open market, and the Fed soaks up as much of that auction as it stated it will (if there is that much to soak up).

    TAKEN FROM “BOND PRIMER”
    THESE ASSHOLES TRULY HAVE A SCAM GOING MAN…….

  3. # 1 NWO Hatr says:

    “Central banks are losing control, and are admitting they don’t even understand what is happening.”

    And you’re f$&king retarded if you believe them.

    bye

  4. 'ol stewbum says:

    Jew-speak
    It doesn’t jive with my goy brain! They create the problems for which they have pre-planned reactions and solutions, trying desperately to make us think they’ll be hard at work, toiling endlessly for our financial benefit.
    The Fed is a giant circle-jerk, with us as the enslaved pivot-men! F–K ‘EM!! NO LUBE!!!

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