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6 Months Before The Fed Is Said To Hike Rates, It Still Has No Idea How It Will Do That
As recently as a month ago we were pounding the table that the Fed's reverse-repo program, which was long said to be, alongside the IOER, the key component that would enable the Fed to hike rates in an environment in which the Fed Funds rate is no longer relevant, is a joke, most notably in "Why The Fed Is Full Of It: Reverse Repo Is A Fairy Tale."
What we also repeated is that while the RRP is meaningless for actual monetary policy it is quite meaningful as a Fed-funded and subsidized quarter-end window dressing facility, widely used by money market funds and banks at the end of every quarter to make their balance sheets appear of higher quality than they are.
Which brings us to yesterday's FOMC minutes. It was there that the FOMC once again reminded everyone of the trivial folly which is speculation just when the Fed will hike rates, when the Fed itself still has no idea how it will actually implement this mechanically, theoretically or practically.
From the FOMC Minutes:
... the manager reported on potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization; the manager noted possible next steps that the staff could potentially undertake to investigate the issues related to such arrangements.
So what are segregated cash accounts? Goldman explains:
The October FOMC minutes revealed a discussion of "potential arrangements that would allow depository institutions to pledge funds held in a segregated reserve account at the Federal Reserve as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization." This idea has been discussed in the past by Fed officials, but has not figured prominently into exit discussions to date.
To understand the importance of this proposal, note that a traditional bank deposit has only a general claim on the assets of the bank, which includes both risk-free assets (such as reserve balances and T-bills) and risky assets (loans, securities, etc.) The proposal would create a special class of account that has a "perfected collateral interest" in specific risk-free reserve assets held by the bank at the Fed. Essentially, it would make the investment risk free from the perspective of the depositor. This is the case regardless of whether the deposit would not otherwise qualify for FDIC insurance. Implementation of these kinds of accounts would presumably reduce the shortage of short-term liquid assets discussed, for instance, at the most recent Treasury Borrowing Advisory Committee (TBAC) meeting.
The bank would earn interest paid on excess reserves (IOER) on the balances, while the rate earned by the depositor would be market-determined. As a result, the extent to which this proposal could smooth the implementation of monetary policy depends heavily on whether such accounts would qualify for a regulatory exemption of some kind, for instance, if banks could treat reserve balances collateralizing the accounts as custodial (and hence off balance sheet) assets. This would reduce the intermediation spread charged by banks—the reason why the effective fed funds rate is much lower than IOER currently—and allow money market rates to be pulled up closer to IOER.
Even without any special favorable capital treatment, segregated reserve accounts could enhance the transmission of monetary policy due to market microstructure considerations. Increasing the number of counterparties with whom cash-rich participants would potentially be willing to invest would increase the bargaining power of lenders vs. borrowers in the money market, perhaps resulting in slightly firmer short-term interest rates.
In addition, we expect that some important lenders in fed funds would prefer segregated reserve accounts to participation in the RRP facility, as it would likely afford more flexibility in when cash could be returned vs. tri-party repo.
Quick note: where Goldman says "segregated reserve accounts could enhance the transmission of monetary policy due to market microstructure considerations" what they mean is simple: there is an unprecedented "money-good, reserve-equivalent" collateral shortage across all asset classes, which in turn is putting various collateral-extracting counterparties under the microscope by other counterparties, if not the Fed. The paradox, clearly, then is that through its 6 years of easing, the Fed has made the very process of tightening impossible, and is now scrambling to find new and improved ways for the banks to agree to stick their hands in the sand and pretend like there is no high quality collateral shortage.
This approach failed to gain traction with the Reverse Repo facility, so the Fed is now hoping it may work with "segreggated reserve accounts."
So, sure enough, one after another banker, the same who lauded the RRP program when it was first introduced a year ago, are rushing to praise the segregated accounts idea. Some soundbites from Bloomberg:
- Potential segregated accounts proposal mentioned in Oct. 28-29 FOMC minutes could be an alternative to the Fed’s O/N RRP facility, Credit Agricole strategist David Keeble said in phone interview.
- Fed officials don’t like the reverse repo facility; “they see it as poison”; Segregated accounts ARE “just another way to suck out cash” Keeble said adding banks won’t incur FDIC deposit fees so the accounts "circumvent problems domestic banks have” and put all institutions “on a level playing field”
- Fed has capped O/N RRP at $300b “so they need to look at other ways to put a harder floor under rates. It’s prudent planning on their part,” Citi strategist Andrew Hollenhorst said in phone interview
- If the Fed goes “down this route with segregated accounts, all money market rates will rise.”
- Segregated cash account (SCA) proposal hearkens to New York Fed/ECB workshop on excess liquidity and money market function in Nov. 2012
- SCAs could “perfect a collateral interest in specific assets (reserves)” on bank’s balance sheet
- Would be created at bank by three-party agreement with lender, bank and Fed: Funds could be wired into account, which directs reserve balances
- Only lender-depositor could issue instructions to make payments out of account, can’t be moved by bank
And so on, but the gist is clear: over a year into the lifetime of one of the two key rate hiking pillars, the RRP, the Fed has given up on its as a primary component of the tightening cycle, and now, a few months ahead of when many believe the Fed will proceed to hike rates, the Fed is proposing a brand new and completely untested mechanism with which to extract record cash from the system.
Bottom line: it has become quite clear that the Fed neither has the intention, nor the market mechanism to do any of that, and certainly not in a 3-6 month timeframe. Which may explain the Fed's hawkish words on any potential surge in market vol. After all, if the nearly $3 trillion in excess reserves remain on bank balance sheets for another year, then the only reason why vol could surge is if the Fed lose the faith of the markets terminally. At that point the last worry anyone will have is whether and how the Fed will tighten monetary policy.
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Debt explosion awaits!
And everybody gets a free tube of Gruber Lube for that bent over and rammed deep feeling....
Gruber lube has ground glass as its special ingredient.
You only get to choose the grit.12 or 20.
Grubered is now a verb.
"Some folks got Grubered."
The last duty of a central banker is to tell the truth -Fed Chairman Arthur Burns
When it get serious you lie -Euro Union Head J.C. Junker
Can this thing just fucking explode or implode already? We are bored....
Best to defer and time *this* rate increase with currency collapse.
"The Fed Still Has No Idea How It Will Hike Rates"
Everyone knows the Fed can't. It's stuck.
There's a 90% chance of QE 4 coming once it's announced the leading indicators are going down.
The Fed is going to get all the inflation it ever wanted plus more once it's realized it's realized QE forever and the US dollar free-falls.
The US follows Japan.
Because they have NO INTENTION of raising rates.
Maybe they have no idea of WHAT NEW LIE THEY WILL USE TO HIDE ONGOING-ENDLESS QE . . . .
The Fed can't create rising rates because a huge amount of foreign capital is entering the country driving the rates down. And that foregin capital is created by foreign central banks. Either they all act together and die or die separate horrible deaths.
If this winter weather keeps torpedoeing our recovering economy we're not going anywhere. Tis a trap.
Heading towards six years of this shit. Do we have another nineteen like Japan?
DavidC
Alas yes.
No way, unless the USD loses GRC status, and very soon.
The FedRes is trapped any which way it moves.
It will and this www.wocu.com Rothschild creation will be the vehicle.
Know your enemy
AD
undoubtedly....
Raise rates?!
There's a higher probability that the big eared long legged mack daddy in-chief will tell the truth ...
Rattus Inliberalitas, going by it's common name of Yellen The Cunt will continue jaw boning (even if its only w/gums) and licking the boots of it's larger cousin, Caenum Tramas Putidas.
The FED is "of the banks, by the banks, for the banks".
The rest is just talk, a crock of bullshit being served up for the citizenry with a free spoon.
Ok, let me repeat this again:
The Fed is not supposed to know anything and they do not.
They do as told.
Congress tells them do this and they do it. Congress tells them do that and they do it
It is that simple.
In order to control the Fed, one or few oligarchs MUST control congress, not the Fed
I think you have it backwards. The first puppeteer hand comes from the PM Dealer banks to the Fed. The Fed's puppet hands goes into the congress and the President.
Feds are just academics absolutely nobody cares about.
No guns, no military, nothing. Fed is an absolute nothing
Is it not the "Fed," and it's banking cartel that finances Congress' profligacy?
Who was it back in 2008 that hauled key Congressmen into a closed door session and scared the bejeebers out of them and then extorted them into passing TARP?
Oh, that's right, it was Hank Paulson (Treasury Secretary) under orders from his bosses at the Primary Dealers, Investment Banks and, ehem,... the federal reserve.
Hank clearly told Congress: "Who run Bartertown???!!!"
Jeez, some people's memories are short...
AT least you get it. Sportsguychestbump!
Really, does the treasury coin the money? No the Fed does!!!!!!!!!!!!!
"The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." — Rothschild Brothers of London, 1863
"Give me control of a nation's money and I care not who makes it's laws" — Mayer Amschel Bauer Rothschild
Just tell us all what bank you really work for ekm1.
FYI- The Federal Reserve does very much have a police force/army.
Those times are gone.
Canada, UK have totally removed power from those guys to create money.
In USA congress rules over Fed, even if local Feds are private, owned by american banks.
And no, Fed has no army. It has just a security company to guard doors, same as at the airport
You forgot the /sarc tag right?
absolutely not.
totally serious
Only people with a loayal army can rule. Office people like the Fed, are just nothing, less than nothing
ekm1 didn't forget the sarc tag, he forgot his brain
Por favor, there are enough more than enough uninformed opinions floating around on the interweb. This one only makes matters worse.
OR you have just won the sarc award for the year.
Each Federal reserve district has an owner, and they are certainly not beholden to each other or Congress or anybody ine USA.
Yes, that list of names by region should be posted everyday on every blog until the the current incarnation of the dollar dies.
Every US federal bank MUST be an part owner of the regional fed area it is part of.
Which means nothing anyway.
Power stays with congress which is the boss of Fed
Go watch those Hawkins briefings again EKM.Es[pecially the body language.
The congresscritters practically suck dick or ass for the FedRes.
Or politely they fawn on their true bosses.
If Congress (or any elected body for that matter) was in charge of the Fed, then they could appoint and/or remove whoever they want to be the Chairman at any time just like every other appointed department head. As it stands, they can only select from a very short list that the Fed gives them and only at certain times.
aka the compartmentalization as all power structures.
What happens to the "variable interest rate derivative" market if the FED hikes rates??
What's with the weird Jeff Goldblum ad now on ZH. I refuse to click it.
Lie , like usual .
You are about 3 times richer than you think .
See
https://www.academia.edu/9405720/The_Economics_of_Disrespect_Update_I
or
http://andreswhy.blogspot.com/2014/11/the-economics-of-disrespect-update...
"After all, if the nearly $3 trillion in excess reserves remain on bank balance sheets for another year, then the only reason why vol could surge is if the Fed lose the faith of the markets terminally."
Federal Reserve paying (with YOUR money) a quarter point on excess reserves
bernanke said that interest paid on excess reserves could be raised to keep money in check
Rate hike will start once recession sets in....may be after june 2015....
why.....because thats how it will work always like this.......
why......to accelerate the crash.......
why....to make life miserable.....
why....people on top want it like this......
market is nearing top may be in next 1 month or two and then slowly turn.....accelerate in june/july and then boom some bank fail.........rate increase......world gdp down....eloba become like panic....blah blh.....
The Fed hikes rates when the public demands it, as prices outrun the ability to keep up ith them. Ala a Volcker clone.
1 big complicated farked-up mess with so many complicated non-solutions.
If hiking rates is injurious to the treasury, then it can't happen. Unless...
Unless things aren't as they appear. For example, how do you know that the treasury is actually paying the coupons on the debt held by the fed? Because the fed says so? Ok, let's check the audit. Oops! We're not allowed to audit!
LOL
Guys, they're going to do whatever the fuck they want and they'll make it look however they want. The end.
Then the rest of the world will stop trading with the U.S., period. Trade is the only thing that matters.
same as it ever was.
Just let the thing collapse already. The bankers must be stopped.
In no other industry does "we'll try not to rape you, kill you, chop you up and stuff you in a suitcase" qualify as a marketing strategy
if they do raise interest rates (not that I think they will) it will be a whopping 25 basis points. Since all their decisions are data driven...I'm sure they will come up with an explanation of how the Russians disrupted our "economic recovery" forcing them to postpone the rate hike.
Consider, please, the disaster made inevitable when the government began its attempt to guarantee bank deposits. By this program, if a bank fails (is seized by FDIC), all deposits over $250,000 are lost.
What, then, are large depositors supposed to do? By large depositors I mean wealthy individuals and companies. What, for instance, is a company with a deposit of half a million, or $500 million, to do? If the bank fails, the company stands to lose $499,500,000.
This has become a world-wide problem.
Initially, large depositors adopted so-called zero-balance accounts (they go by many names, and details). By these accounts, balances would be swept into US Treasuries at the end of each day; thus, large depositors would have no risk overnight (relative to the bank).
But this was a limited solution measured by the number of Treasuries available: there weren’t enough to go around: remember, we’re talking about a world-wide problem.
This demand for overnight protection is what fueled the growth of the Mortgage Backed Securities (MBS) scam. And, when these began to lose their face value, holders panicked, but were/are rescued by Federal Reserve purchases of same.
The proposal to establish “segregated accounts” is merely another “kick the problem down the road” another few feet or so.
Whether called ‘zero-balance accounts’ or ‘segregated accounts’, they are all a small part of a much bigger picture: ‘What is the collateral (and counterparties) for all “cash equivalents” issued by banks, Federal Reserve and US Treasury?’
By “cash equivalents” I mean 1) the term, “cash equivalents” that appears on the asset statements of corporations (where it used to be, simply, “cash”); 2) all issued Federal Reserve notes; 3) all federal debt instruments; 4) MBS possessed by the FR (possibly others); 5) total reserves of the American banking system; 6) $ instruments held by foreign investors; 7) among other items.
All these “cash equivalents” are collateralized by a scrap of paper held by the Federal Reserve listed as “gold certificate”; which represents a claim on a scrap of paper held by the US Treasury and listed as “gold and gold swaps”.
This phrase, “gold swaps”, should tell you that the alleged gold of Fort Knox is not all physical: at least part exists as paper.
Now, our problem is, ‘What price is necessary to make the collateral, “gold and gold swaps”, equal to all those “cash equivalents” (liabilities) listed three paragraphs above… $7000…. $70,000… infinity?’
Don’t hesitate to have your lawyer or accountant verify my work.
hmm, banks are short quality collateral(T-notes) and under-collateralized, as a result of fed buying crowding out banks, o/n reverse repos was one attempt to try funnel them back to the banks, but can only do so much.
how best to funnel those needed collateral onto the banks' books?
create account at fed to hold collateral for banks, so it only needs to move from one fed account to another fed account.
now how will the fed held T-notes and reserves(quality collateral), on the fed's books, funnel into these new-fangled segregated reserve accounts, still at the fed?
will they call it a deposit from the banks and pay them interest on it? and the interest paid on it will be the new transfer mechanism for rates, because the old mechanism of interest on excess reserves is dead, am I on the right path or is this guess a bit too wild??
so I can't give the collateral I bought back to my masters, who need it, and overnight window dressing only goes so far. so I pass it from my left pocket to my right pocket, and claim my right pocket is holding it for my masters, allowing them to use it as collateral pledge for their books; while my masters claim it is custodial and off-balance sheet, acknowledging it is still mine and not theirs.
all prim and proper, awesome.
The FED will never increase the FFR - ZIRP is the monetary/economic/financial/political/social equivalent to entering the gravitational field of a Black Hole - you can never get out.
America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit, when we add this to our enormous government deficit it is easy to see that we are living far beyond our means. The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop.
The Fed must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect or things will spin out of control. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elusive.html