This page has been archived and commenting is disabled.

"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.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 12/04/2015 - 02:49 | 6874478 Free_Spirit
Free_Spirit's picture

yeah totally sophisticated models,  but the "problem" is what outcomes they want that model to produce... its not what Joe Public working on Main St or retired would want to see happen.  More on the lines of keeping the 1% liquid at all costs ... 

Fri, 12/04/2015 - 04:50 | 6874590 Bazza McKenzie
Bazza McKenzie's picture

Sure, like the warmists have models to predict global temperatures (which unfortunately have all been wrong for the last 18 years at least).

That claims to be a science too.

Fri, 12/04/2015 - 06:35 | 6874678 Exalt
Exalt's picture

Computable general equilibrium (CGE) and Dynamic Stochastic General Equilibrium (DSGE) models exist of course. Economics is not as "mechanical" or "hydraulic" as you might expect though. Pulling this lever today doesn't produce the same result as pulling the same lever tomorrow. Modelling doesn't capture the ever changing nature of complex systems very well. It's a bit like trying to predict the weather but with the knowledge that the weather system's rules and variable definitions are changing all the time.  

So the more general problem with any sort of extensive modelling of a complex system it's going to confirm your bias more than predict the future. After all, you decide the theory supporting the model, the parameters fed into it and the definition of the data you feed into it too. In the case of a central bank, there's a lot of incentive to confirm your bias and validate your foregone policy conclusions. It's a big problem to put a lot of faith in such models. Keynesians will argue you just need the "right" model done by the "right" people.

So yeah... there are models, but it is hubris to think you have the "right" model or the "right" people. That is what the science of economics is about. Defining the system as best as one can and trying to decipher it's core mechanics so you can make more reliable predictions but simultaneously recognising you will never have it fully figured out. It is also why the price discovery mechanism is so important, because prices capture all information that will never be fully available or discernable to a PhD with a computer (central planner).

This is why positive study trumps normative study in almost every case. You measure the world as it is not as how it should be. There's no need to be derisive about economics as a science though, of all the social sciences it is the most scientific. That is until the Keynesians arrived.

Fri, 12/04/2015 - 09:06 | 6874905 hooligan2009
hooligan2009's picture

enjoy, but remember the outcomes are despite the Fed, not because of it

http://sffed-education.org/chairthefed/WebGamePlay.html

 

 

Thu, 12/03/2015 - 23:33 | 6874063 FedFunnyMoney
FedFunnyMoney's picture

I see a currency crisis looming.

Thu, 12/03/2015 - 23:42 | 6874085 natxlaw
natxlaw's picture

They were never going to raise the rate. EVER!

Thu, 12/03/2015 - 23:52 | 6874121 Shizzmoney
Shizzmoney's picture

I bet this rate hike is so that the market tanks after they do it, then the bankers and hedgies on the inside get to buy up all the assets dipping on the cheap, and then the Fed has to swoop in again and "miraclously" we get to DOW 20K by the election, and all of the rich people make money.  

Good for them.  And by good for them, I mean, I hope they all get cancer.

Fri, 12/04/2015 - 00:06 | 6874164 Atomizer
Atomizer's picture

It's the magic shell game being managed under Central Planning Czars. 

/LOL

Fri, 12/04/2015 - 00:08 | 6874172 Yen Cross
Yen Cross's picture

 I see Progress.

Fri, 12/04/2015 - 00:12 | 6874186 Atomizer
Atomizer's picture

You can't make this shit up. It writes itself for failure. 

/LOL

Fri, 12/04/2015 - 00:22 | 6874194 One And Only
One And Only's picture

The longer the FED waits the more expensive it gets.

This is like Volker in reverse but worse because the FED has an effective call option on the market. What happens when it's called back (which is what hiking the fed funds rate does)?

ugh. nightmare.

Fri, 12/04/2015 - 00:41 | 6874236 Atomizer
Atomizer's picture

They want a new pet rock Global Currency. 

Porno for Pyros - Pets - YouTube

 

Fri, 12/04/2015 - 00:39 | 6874256 Shrike99
Shrike99's picture

Not so sure about that ZH.

The hike will no doubt be accompanied by a metric ass-ton of dovish foward guidance sugar to help the medicine go down.

This will be a red letter day for the PTB and all hands will be on deck. Shorties might get squeezed pretty hard.

Sun, 12/06/2015 - 18:33 | 6884730 LooseLee
LooseLee's picture

You think just like a Pinko Fascist Commie....

Fri, 12/04/2015 - 00:50 | 6874292 Atomizer
Atomizer's picture

Repeating a old message. You have to see the illusion thru the fog. Life becomes better after the stepping stone. Learn. 

Era Of Shattered Illusions - YouTube

Fri, 12/04/2015 - 01:24 | 6874355 Troy Ounce
Troy Ounce's picture

 

 

I understand there are US$550Trillion interest linked derivatives outstanding.

 

A 0.25% interest rate hike by the Fed would demand globally US$ 1.375T (0.25% of 550T) more interest payments, no?

 

Someone?

Fri, 12/04/2015 - 01:47 | 6874375 Yen Cross
Yen Cross's picture

 usd/jpy

As rates "normalize" or rise, borrowing costs become more apparent

The Nikkei has no business trading the 19-20k handle.

 The Dax, and FTSE indexes are "over priced".

Fri, 12/04/2015 - 02:17 | 6874439 Atomizer
Atomizer's picture

Well said Yen. However there is no pea under the shell. The con artists motivation is to create new tree money Quantitative Easing  under a fund or exchange account. Global fund. Wallstreet and bank of London 

Contact the following 

The Central Bank Of The Republic Of Turkey

442072209590

http://www.google.com/search?q=bank+of+london+central+bank&oq=&gs_l=mobi...

Fri, 12/04/2015 - 06:32 | 6874697 hooligan2009
hooligan2009's picture

..1/4% times 550T is 1.375T.. and yes the floating interest rate leg of a swap will increase in line with any increase in the 90 day LIBOR rate (yes, that LIBOR fixing rate)

swaps come in many shapes and sizes..the market is a discounting mechanism for expectations

see here for some drivel on how one commentator looks at things

https://www.blackrock.com/investing/literature/market-commentary/fixed-i...

frequently used swaps have tenors of 3, 5, 10 and 30 years. they can be cross currency, cross asset, fixed for floating, fixed for fixed, inflation for floating etc.

fed fund futures provide one lens for seeing how the market has already discounted the average 30-day fed fund rate for dates following the fed meeting in two weeks (note it does that on a continuous basis 60x60x24x7 for all fed fund rates

you can check expectations out here

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

the same game is played for the fixed coupon leg of a swap; you can check out one example for five year swaps here

https://ycharts.com/indicators/5_year_swap_rate

 

Fri, 12/04/2015 - 07:37 | 6874746 overmedicatedun...
overmedicatedundersexed's picture

alot of debt is just digital..and like Hillary's emails digital can go missing in a nano second.  poof no debt. so total us .gov debt is a number waiting to be massaged, no getting a daily massage. with a happy ending for the club we all ain't in.

gotta add a hint here for the less quick..FED buys debt, then FED deletes debt via fat finger mix up..simple no?

Fri, 12/04/2015 - 07:54 | 6874771 hooligan2009
hooligan2009's picture

might check this out

http://howfiatdies.blogspot.com/2013/02/excess-reserves-is-like-governme...

 

i still think the fed just cancels the debt and the treasury cancels the bank notes vian exchange of letters (real ones not Q and E for In God We Trust

Fri, 12/04/2015 - 08:09 | 6874792 overmedicatedun...
overmedicatedundersexed's picture

hooligan, that is why an audit of the FED is so dangerous.  The game of hiding debt, cancel same and print fiat to keep .gov debt ratio's at levels that keep the FRN strong, while earning interest for the private cb's club and also keeping the benefits from DC coming is why yellen and bernake say they are saving the us public, grandma and grandpa should shut up about low interest.

gods work indeed.

Sun, 12/06/2015 - 18:37 | 6884748 LooseLee
LooseLee's picture

Satan's work, no less and what's more a FRAUD against all living beings. Only those who deserve death by guillotine rig news, markets, et/ al. to DECEIVE the masses. Their time is running out...

Fri, 12/04/2015 - 03:38 | 6874527 V for ...
V for ...'s picture

Babylonian Talmud money majick...hoisted by its own petard.

Enjoy the show. I will.

Pity for those who voted for it.

Everything was noted in the last Fed minutes, published. Anyone for karaoke? Japan comes to the world, courtesy of the liar loans. All ok for the Fed shareholders getting 6% on all of it.

PRINT! And war.

Old joke: why did God make gentiles?  Someone has to pay retail.

Fri, 12/04/2015 - 04:11 | 6874560 damicol
damicol's picture

I doubt anyone really understands how this works except the Fed.

C'mon guys, get the brain into gear, think outside the box.
What does the Fed do, stop thinking in terms of munnee, or yield curves or repo rates or liquidity.

Yes, its that simple, between now and two weeks time when the cunt yeller stands up and starts to make fucking guttural noises with its beak it will have already happened.

No one will be listening because everyone will be so fucking awestruck at the size of the fucking false flag that just went off.

I'm thinking something along the lines of maybe a nuclear plant going supernova with a blast wave flattening everything for 40 miles and a hundred thousand dead and a Syrian passport miraculously blowing about and found in the rubble yards from the epicentre

Fri, 12/04/2015 - 04:20 | 6874570 katchum
katchum's picture

Liquidity is a problem, but also the losses in corporate bonds market to market.

Fri, 12/04/2015 - 05:34 | 6874646 Expat
Expat's picture

Well, in case you needed to know just how much the Fed, Wall Street and the 1% have fucked the economy and the rest of us, this shows it.  When a 25 basis point move can derail the world, there is something very, very wrong.

Can we start lynching before the catastrophe or do we have to wait until it happens?

Fri, 12/04/2015 - 05:54 | 6874663 TheBeatles
TheBeatles's picture

All 1oz Silver coins are €12 @ EurGold

 

https://www.eurgold.eu/silver/silver-coins/

Fri, 12/04/2015 - 07:50 | 6874768 Raymond_K._Hessel
Raymond_K._Hessel's picture

Theyre gonna hike and enjoy the cover of the christmas debt binge.

They also can work with goldman and jp and boa to make things seem happy and shiny long enough for los muppets.

Im right on this one. Theyll raise rates, after a little volatility youll see what looks like signs of 'recovery' and then a rug pull - perhaps arond the time ww3 really gets going

'We' never have any idea at all how much the fed prints or for that matter destroys.

Shit - they may sell a bunch of gold Ks
http://www.federalreserve.gov/faqs/does-the-federal-reserve-own-or-hold-...

They can manipulate pms, so they can manipulate stocks and bonds - all you need is a few market making friends.

long oil. Winter is coming.

Fri, 12/04/2015 - 07:59 | 6874780 truthalwayswinsout
truthalwayswinsout's picture

I don't care because I just purchased a house on Haka Baka Daka Laka street near my new hero Obama bin Laden and got some special medicine to make sure they can't tell I'm White, or even worse a person who saves money; the new crime in the National Socialist regime.

Fri, 12/04/2015 - 08:34 | 6874827 gcjohns1971
gcjohns1971's picture

Interesting that ED Skyrm's estimate for reverse repo's almost exactly matches the amount of physical cash Dollars in existence.

Fri, 12/04/2015 - 08:36 | 6874829 Tjeff1
Tjeff1's picture

If the FED is going to raise interest rates, they will raise them while also doing QE (a stealth QE).  These purschases will loosen the money supply to maintain liquidity.

Fri, 12/04/2015 - 09:05 | 6874899 TrustbutVerify
TrustbutVerify's picture

Spend some of your money you'll likely lose in the markets soon now to buy some real American goods - not phony foreign made 'American' brands.  The money needs to go down to the level of people that make things.  

Shrink the river of money leaving the country.  

Fri, 12/04/2015 - 15:24 | 6876830 bluskyes
bluskyes's picture

Don't  worry, all of that monney will come back in a torrent of hyperinflation.

Fri, 12/04/2015 - 09:45 | 6875049 The Ram
The Ram's picture

BTW, HardAssets, it was not Dorothy who discovered the Wizard running the 'show'.  It was the little dog Toto.  The idea being that an animal's basic instinct is better to feret out truth than the human intellect.  

Where is Toto when we need him!!

 

Fri, 12/04/2015 - 10:05 | 6875133 Vuke
Vuke's picture

Sounds awful, I know.

Fri, 12/04/2015 - 10:04 | 6875134 Vuke
Vuke's picture

In my wildest dreams I never imagined our future could be determined by a withered vagina.

Fri, 12/04/2015 - 11:09 | 6875388 More Ammo
Sun, 12/06/2015 - 18:30 | 6884716 LooseLee
LooseLee's picture

"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:"

Tyler; I don't think the Fed got the memo...

Sat, 12/12/2015 - 17:35 | 6915395 truedisbeliever
Thu, 12/17/2015 - 01:51 | 6933929 Kelley
Kelley's picture

Not to worry. In a nick of time at the Federal Reserve Christmas party dinner Janet will pull an $800 billion bill out of her purse with her picture on it. She'll hand it to the waiter and say, "Keep the change."

The waiter will promptly buy some new rims for his car and buy a round of drinks for all his fellow coworkers.

How does that solve the problem, you might ask? The rims cost $799,999,999,000. 

So does a gallon of milk.

 

Do NOT follow this link or you will be banned from the site!