"But It's Just A 0.25% Rate Hike, What's The Big Deal?" - Here Is The Stunning Answer

Tyler Durden's picture

After today's market plunge, the result of what even Goldman admitted may have been a major policy error by the ECB, suddenly the Fed's determination to hike rates in two weeks lies reeling on the ropes. After all, what the ECB did was an implicit tightening of reverse QE1 proportions  (it is no accident that the EURUSD is soaring as much as it did in March 2009 when the Fed unleashed QE).

But assuming the Fed is still intent on hiking at all costs, and does just that in two weeks time, a question many are asking is where will General Collateral repo trade in case the Fed does decided to push rates higher by 0.25%: after all the Reverse Repo-IOER corridor is the most important component of the Fed's rate hike strategy, one which better work or otherwise the Fed will be helpless to raise rates with some $3 trillion in excess liquidity sloshing around, and what little credibility it has will be gone for good.

And much more importantly, what are the liquidity implications from such a move.

For the answer we go to the repo market expert, Wedbush's E.D. Skyrm. Here are his thoughts:

Where will General Collateral trade when the fed funds target range is moved 25 basis points higher to .25% to .50%? In the most simple method, GC has averaged about .15% for the past month, which implies a GC rate around .40% after the Fed move.



However, given the unprecedented amount of liquidity in the financial system, there's a belief the Fed will have problems moving overnight rates higher.


We have two quantifiable events over the past few years where the Fed moved Repo rates higher or lower: quarter-end and the QE programs. Given there are so many moving parts, consider these to be very rough estimates: Beginning in 2015, when funding pressure began each quarter-end, the market, on average, took approximately $255B additional collateral from the Fed and, on average, GC rates averaged 20.5 basis points higher.


In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.

If readers didn't just have an "oops" moment, please reread the last bolded sentence until they do, because it explains precisely what the market is missing about the Fed's rate hike cycle: according to Skyrm's calculations, to push rates by a paltry 25 bps, the smallest possible increment, what the Fed will have to do is drain up to a whopping $800 billion in liquidity!

Putting that in context, QE2 - which pushed the S&P higher from November 2010 until June 2011 - was "only" $600 billion.

In other words, to "prove" to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2.... only in reverse.

For those who think this will have a positive, or even neutral, impact on risk assets, we have several bridges located in Brooklyn that we are looking to offload at 150% of par. Please send your BWICs to the usual address.

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Kaiser Sousa's picture


thread change....and for good reason....bitcoin...hilarious. DEATH TO THE MONEYCHANGERS.

"Goldman Sachs has made a patent application for a cryptocurrency settlement system in a move that underlines bank hopes that the architecture behind bitcoin can revolutionise global payments. The application for a new virtual currency, dubbed “SETLcoin” by the bank, said it would offer “nearly instantaneous execution and settlement” of trades involving assets including stocks and bonds.

Banks have been racing to tap the power of blockchain — the ledger system that backs digital currencies such as bitcoin. Harnessing the technology has been likened to the changes wrought by file transfer systems on the music industry, or to the effect that email had on communication.

Although electronic dealing platforms have increasingly made front-office trades virtually instantaneous, the actual swapping of payments often still takes days, creating risk in the banking system. The premise of blockchain is a network of computers that share the costs of transactions and use cryptography to keep deals secure, although regulators have expressed concerns about this aspect. Trades are recorded on a public ledger that anyone on the network can see. Potential uses range from payments and storing client identities to possibly developing “smart” products, such as a credit derivative that pays out automatically upon default by the underlying company.

Goldman’s recently published application, first reported by bitcoin magazine, describes processes “to substantively instantly settle securities, based on cryptographic currency technology, without the risks associated with traditional settlement technologies”.




coinhead's picture
coinhead (not verified) Kaiser Sousa Dec 3, 2015 7:29 PM

OMG!! You said Bitcoin!

SillySalesmanQuestion's picture

I say, Shitcoin. It only has a half life of the next 24 hour BM...

847328_3527's picture

Are we still allowed to say the "B" word?

Stuck on Zero's picture

I look forward to the interest rate increase. Instead of earning $0.42 in interest on my $100,000 bank deposit I'll earn a whopping $0.48. 

Anonymous User's picture
Anonymous User (not verified) nmewn Dec 3, 2015 9:19 PM

Happy dance



nmewn's picture

Dude, I know what it is and I don't click on any links offered, especially the virusy kind.

Don't you have Huff-Po people to infect?

Anonymous User's picture
Anonymous User (not verified) nmewn Dec 3, 2015 9:46 PM

Porn won't infect you. Unless you're Charlie Sheen.

Then you should die a horrible death.


balanced's picture

Well Dec. 16th would make sense as it's a couple of days before the Christmas/New Year vacation period.

Squid-puppets a-go-go's picture

Tyler takes the worts case scenario - $800B liquidity drain.

But best case scenario remains a 50% drain of QE2's $600B overnight.

So even thats worth putting in your pipe and smoking.

Nobody For President's picture

You say rate hikes ain't gonna work, then predict massive deflation and QE.

I'd call that working pretty damn well, for some folks...


Recidivism's picture

Apart from ZH and Wall Street, who the fuck wants ZIRP forever?

eatthebanksters's picture

As far as your projections as to what the Fed move will do, I will offer a quiet 'ouch'.  Anyone who bought into the bullshit of manipulated and artificailly levitated asset prices that made money off of QE and ZIRP should not cry now that the Fed tries to go down the road of normalization (which may still never happen).  Does anyone think equities and real estate can maintain these lofty values when average incomes across America have actually gone backward?  I think the Fed wants to try and ease the air out of the balloon slowly in stead of watching it burst.  My powder is dry and safe.  I'm not searching for a bottom, just real value, which hasn't been around for years.

Tejano's picture

They will not raise rates. They cannot. It is that simple.


MANvsMACHINE's picture

You are 100% correct. There is money to be made on this. Look back in September at what moved when the Fed stood pat. Dollar drop, PMs spoke, etc etc.

zhandax's picture

Oh, they can raise rates.  The point of  this whole exercise is to collapse sovereign currency with the dollar the last man standing, and this will accomplish that.


evokanivo's picture

So the US dollar will continue to devalue. If you believe oil will increase (has it hit a bottom?), consider that Russian banks offer 7-10%, depending on the amount and duration. Obviously you are taking currency and bank risk. Just a thought.

zhandax's picture

A base rate raise, and the dollar continues to increase against foreign currencies.  Simple PPP.  Where would you rather hold a cash balance; negative or plus .5?  Foreign dollars flood into the country.  This will have yield-curve shaping consequences as well, as those with immediate cash needs will favor next week's T-bills, while those with longer range cash demands will favor longer maturities. While it sounds insane, it appears the Fed is determined to raise rates to save what is left of their credibility..  Replay of 1937?

Rodders75's picture

They'll most likely raise supposedly to preserve credibility then do a shitload of QE next year. Bunch of monkeys. 

Farqued Up's picture

I agree with you, but given their stupidity, they will probably do it anyway.

FireBrander's picture

I saw an online ad for a credit union offering 3% on a checking account; a few hoops to jump through, but still 3%!


Rand Paul: "Democratic" Socialism Is Still Theft"; yeah but at least I get the goodies! Republicanatic Crony Capitalism is also theft; and now I'm the victim..



tmosley's picture

You will lose 100% of your principle.

Stay the fuck out of banks.

johngaltfla's picture

Fascinating article Tyler. Because if the math is correct, which I believe it to be or damned close, then the Fed is about to drain several hundred billion dollars from an illiquid credit market leaving no bid at year end. So after the Fed created mini-crash, then a Santa Claus Bullcrap Rally, we move into year end and on to January with a smashing potential for a 10-20% rapid correction in the S&P along with a Treasury market crashing in parallel and no buyers.

Shit could get real between the next two Fed meetings, that is for certain.

knukles's picture

They drian that much ... regardless ....
With the economy this sick and the general malaise wafting about the consumer/public, it will be The Single Biggest Fuck Up ever Committed to by a Central Bank since Germany post WW!.
Long term bonds will have a 1% handle before it's all over if they do that.  Think we got deflationary pressures now?

FireBrander's picture

Bernanke did a little "draining" of his own; and brought down the global financial system...


Yellen my just be trying to secure her spot on the cover of Time for "Saving Us Again".

Squid-puppets a-go-go's picture

can someone remind Yellen she can reset gold to $50k / oz and settle america's debt?

She better do it soon coz if Shanghai decides to step up and take over the global pricing mechanism america is stuck with its debt for centuries.

And she better do it soon for my sake too, there's a nice Bed&Breakfast I want to buy.


RafterManFMJ's picture

If rates do go up next meeting, this will positively be the last "Fed will do X" article that I read.

I just cannot take the suspense.

MANvsMACHINE's picture

And if the Fed stays put, will you then believe that they will never raise rates?

How many times do we need to see this film to remember how it ends?

HardAssets's picture

In the end, the Wizard is behind the curtain pulling off a scam.

Dorothy sees & figures it out. As for the general public . . . who knows?

Fish Gone Bad's picture

In October of 2008 there was a fairly large drain of money and things got scary (https://research.stlouisfed.org/fred2/graph/?chart_type=line&height=600&...[1][id]=MULT&width=1000).

nmewn's picture

A child screeching:Theres No Malaise! Theres No Malaise!!!...lol.

Kayman's picture

"The Single Biggest Fuck Up ever Committed to by a Central Bank "

The single biggest fuck up is believing Central Banks can grow an economy. Financialization of everything has resulted in the earth coming to an end over a 1/4 % rise in the Fed Rate ?

They have been shitting in our nests for nearly a generation, caused the greatest misallocation of investment in history, created boom and bust cycles of ever increasing proportions and now they fear raising rates 1/4 % ?  Wake me up from this Kafkaesque script.

False_Profit's picture

Please remember...these moves are not accidental, they are moves toward the final destruction of the United states by entities who have no loyalty to the United states...

Gott mit uns...

coinhead's picture

Bitcoin doesn't seem to be suffering any half life decay so far?  Can we say the same for your brain?

HardAssets's picture

But Bitcoin is private & secure !

All the folks without a Phd in Computer Science & who haven't spent a lifetime career studying the mathematics of such systems say so -

afterall, they read that in an article.

White Mountains's picture

99% of people who hate BitCoin don't even know what BitCoin really is.  "I hate it because I don't understand it".

Those who know what BitCoin really is, 99% realize it's potential to revolutionize the financial system and take back our freedom.

You are likely noticing how more and more people and businesses are coming on board the BitCoin express.  Truth, like math, is immutable.  This is why BitCoin is a game changer.

Some say ignorance is bliss.  Go ahead and be blissfully ignorant.  Stick with dinosaur media and dinosaur banking, that way you don't have to think much.


Hoorrah- Gold Sack Shitcoin - put the dirtiest player in bed with crypto currency.

That - ought to kill it with fire.

Baked Satoshi Alaska Shitcoin, Ball Sachs Style.

nmewn's picture

Yeah, I never could figger out if he was actually trying to trash BitShit with his incessant BitBS or just pumping it gain another ethereal fiat called the dollar.

I went with the old axiom, if it's overly complicated, it's likely a fraud. 

coinhead's picture
coinhead (not verified) nmewn Dec 3, 2015 11:38 PM

....in which case your computer is a fraud and probably most other "complicated" things (for you) are also "frauds".

Tall Tom's picture

Take a gander at the spyware on Windoze 10?


Oh...You do not run Windoze 10 anf run Unix to avoid that?


Well I do not use BitCON to avoid that.

coinhead's picture
coinhead (not verified) Tall Tom Dec 4, 2015 12:47 AM

Teh we doesn't know what you are trying to say?  Maybe if you could try again but make sense tish time?

Colonel's picture

Maybe it was too "complicated" for you.

HardAssets's picture

If its impossible for me to truly understand it - because we only have one lifetime, & I didnt use the required years of mine to deeply study such systems -

I stay away from it.

I don't know if Bitcoin is 'good' or 'bad', but I recognize what I know and don't know. And, there is no way for me to make that determination. So, I would be left with 'believing' what someone else tells me.

Kinda like organized religion.

Usurious's picture
Usurious (not verified) Kaiser Sousa Dec 3, 2015 7:41 PM

“smart” products, such as a credit derivative(s)..........ya cause we need more of those.........

tarabel's picture



A little grease for the Patent Office and Voila!

All your bitcoin will be subject to a Goldman royalty fee every time you use it.

StrikerMax's picture

More likelly a very small fee for a decent lawyer and Goldman Sachs has to pony up Billions to the Bitcoin foundation ...

Get real ... read what bitcoin is all about and what a Open Source License mean and Who Owns the License ...

Kayman's picture

Licenses are granted by governments- governments who can withdraw such licenses. While I don't know the mechanics of Bitcoin, I do know that encryption can be broken. So if Bitcoin is rooted in encryption, the risk of loosing your dough still exists.