Yellen, You Have A Problem: The "Rate Hike Corridor" Just Broke

Tyler Durden's picture

One week before the Fed hiked rates by 25 bps we warned that "nobody knows if the Fed can actually do it", citing not only our previous post on the topic, explaining the lack of a detailed framework by the Fed on the mechanics of the rate hike, but also a Bloomberg piece in which we noted the broader logistical concern: "with so much cash sloshing around, will Fed officials be able to nudge rates as high as they want? Will the new-fangled tools they’ve created to engineer the move work, or instead sow the kind of confusion that can dent the Fed’s credibility and spur a broader market selloff?"

The good news, at least initially, was that the Fed's plumbing worked smoothly, and instead of the Fed draining up to the $1 trillion in excess liquidity some such as Citi had predicted, the very first fixed-rate reverse repo operation saw just $105 billion in liquidity soaked up by the Fed from 49 counterparties.


Was there somehow too little excess liquidity, or was there something more structural at hand. It didn't matter: after all the Federal Funds rates was solidly inbetween the 0.25% floor and 0.50% ceiling set by the Fed's Reverse Repo and Interest on Overnight Excess Reserves, and there was no reason to worry that the Fed had made a mistake.


However, this changed today when the Fed Funds rate just tumbled to 0.12%, far below the required 0.25% floor set by the Fed, and down 23 bps from the effective 0.35% Fed Funds rate set yesterday, confirming that indeed the rate hike corridor can and has been breached at least once, and just two weeks into the Fed's rate hike experiment.


To be sure, while this is clearly a structural failure of the rate hike corridor, it also reflect the quarter and year-end window dressing we discussed first well over a year ago. SMRA confirms as much:  

the fed funds rate has dropped to 0.12% this morning, down from 0.47% yesterday. The fed funds rate has dropped at month-end for all of 2015, with some of the larger of these moves occurring at quarter end, like today.


It appears that these drops will still occur even after the fed rate hike, and possibly that the will be even more extreme, since today's drop was about 23 basis points, as opposed to previous declines this year, which were usually between 5 and 10 basis points.

True, there is always an excuse, and in this case it has to do with banks window dressing their balance sheets for the quarter or year-end.

However, the fact that there is this kind of major discontinuity in the Fed's rate hike process, throws a huge wrench in the credibilty of the Fed tightening effort.

After all, if banks can steamroll with impunity the Reverse Repo 0.25% floor to park hundreds of billions, or trillions, in liquidity, then the Fed's entire experiment will be worth nothing. Keep in mind, the rate hike process only works if banks don't get a chance to revert to an old standby liquidity regime on the last day of any quarter, in the process getting all the benefits of ZIRP even as the Fed parades just how tight financial conditions are getting.

Just imagine what would happen on December 31, 2016 if the Fed Funds rate plunged from 1.25% to 0.12% overnight? That would suggest that while the Fed may have drained liquidity for 99% of the quarter, on the one day it matters - the day when the bank's balance sheet snapshot is formalized for 10-Q and 10-K purposes, ZIRP regime has returned.

What all this means is that the Fed's attempt to allow banks to "voluntarily" return excess liquidity has failed, just as we expected it would courtesy of these kinds of dramatic rate discotninuities, and that if Yellen is indeed serious about soaking up liquidity and "bursting bubbles", she will have to either force banks to submit far greater amounts of liquidity, or drain liquidity structurally, by unwinding the Fed's balance sheet instead of pretending financial conditions are tighter by pushing the Fed Funds rate by 25 bps even as the Fed still own trillions in various assets. Because another way of putting all this is that the Fed is tightening bank financial conditions on all days in the quarter... except the one when it actually matters!

And needless to say, the impact on risk assets as a result of the Fed announcing a real liquidity drain - like trimming its balance sheet by a trillion or more - would be dire.

For now, we sit back and watch to see just how the Fed will spin this first failure of the rate hike process, because now it is no longer merely a speculation: the market knows that Yellen has a problem.

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Wulfkind's picture

"Americans, You're Fired"

Shocking ( or maybe not ) Buzzfeed report

Tom Servo's picture

that buzzfeed article is a month old...


and yes, it's some real journalism, by buzzfeed, that's how far we've fallen...


Wulfkind's picture

Well, it's no big surprise that the Main Stream Media including the WSJ would not report on this.  They are desperately trying to hang on to ad revenue from the very same H1-B Visa and Slave Labor Corporate Whores they would be pissing off if they DID report on this.

Save_America1st's picture

If Trump wins this fucking thing next year I hope somebody influential refers him to ZeroHedge.  He should hire you guys (the Tylers) to consult him on all this shit.  It would be the best way to start turning the Titanic around if there's still time to do so.

What better resume is there than 8 or 9 years of ZeroHedge analysis and predictions that almost always come true?


Tall Tom's picture

You do not get it.


If Trump tried to change anything then he'd be shot.


Who protects him? US Treasury Agents, the Secret Service.


When a new President elect is introduced he is shown a film...the Zapruder Film


The Secret Service give the President elect a warning. "This can happen to you."


Look..Reagan promised a total revamping of the US Economy from the disasterous Carter years. I VOTED FOR HIM as I believed that he was going to reform it.


He appointed reformers to his cabinet. He was serious.


He did not last for 90 days before a bullet was shot into his chest. Hinckley was a Yale student, like Skull and Bones Yale, you know?


The US Treasury was INVOLVED. That warning was not from concern over his safety. It was a threat as he was threatening the whole MIC. It happened. They killed Kennedy for similar reasons.


There is NO HOPE. NONE. I am sorry.


I like what you write but you must face reality. (And thanks for that movie link. It is not that I do not appreciate you. I do. appreciate you. That is why I take my tiime and effort to inform you. But I am not going to stop quoting you poetry, ya know what that means if you watched that movie. Poetry is like the truth, ya know?)


It is NOT GOING TO GET BETTER, In fact you can wager that it is going to get much worse.


I am sorry but you are going to have to face the CONSEQUENCES of that reality regardless if you accept or reject that fact.


You have to save yourself first. Then your family and the loved ones that you can help. America is nearly last on the list. And the World is dead last.


There is NO HOPE.

Takeaction2's picture
Takeaction2 (not verified) Tall Tom Dec 31, 2015 11:12 AM

My heart agrees with you, but I still have a little hope that he will follow through.  I am all in on TRUMP.

JRobby's picture

Janet's will, stupid promises on "draining liquidity" vs.

Bond & Money Markets

knukles's picture

Oh come on.  I've seen funds up 10% form targeted level or down to 0% on quarter's end let alone year's ends. 
And why not drop?  There are more excess reserves looking for a parking spot than Bammy has FSA voters in Chicago

Squid-puppets a-go-go's picture

yer 'the market knows yellen has a problem' - riiight. Rather, the market now knows yellen has a new crafty way of extend and pretend.

i think the market are perfectly chuffed with this outcome. Sure the Fed is window dressing its credibility but thats the only kind of cred the market gives a fuck about

NotApplicable's picture

Hope in one hand, shit in the other. Which fills up first?

bonderøven-farm ass's picture

It's all shit. 

Unless, you rest your reality on the agitprop of the Treasury Department.....

Deathrips's picture

Q: Who protects Trump?

A: Israle Zionists including the Clintons.


Why people want to be led , like, by a a mystery. /s/


bonderøven-farm ass's picture

No mystery. The majority of people prefer safety to liberty. You see it in every culture throughout history.

Most all are easily frightened; 

....are greedy, envious, intolerant, facile, (________), etc.....they need direction. 

Slavery is the past, the present, our future. It's the perpetual human condition.

More Ammo's picture

The genepool needs some bleach.

I Will Explain All's picture
I Will Explain All (not verified) More Ammo Jan 1, 2016 1:59 AM

just mix with 3rd world countries and voila

Tall Tom's picture

Damn it RIPS...


It depends upon what shepherd.


My leader is just not of this World.


I do not want to go into this debate right now.


Besides I am going to be rootin' for the StanFURD Cardinal..Go Trees.


(Sorry Freddie but I do have my favorite Universities (PAC-12)...and every man has a vice to indulge in. I am no exception.)

USisCorrupt's picture

Tall Tom

It is REFRESHING to see that some understand just how the system works.

Keep up the good work.

HopefulCynic's picture

This is bullshit! Presidential nominees are already part of the establishment. A person can not become a candidate unless he is cooperating. 

Takeaction2's picture
Takeaction2 (not verified) Save_America1st Dec 31, 2015 11:11 AM

That's why I like TRUMP.....if he doesn't know what is going on, he will hire the best fucking team to figure it out.  People just don't get it.  This guy is the DREAM TEAM MANAGER...and that is what we need.  We need a he is.  And I have tried to talk to many dumb fuck democrats and I just try to explain one thing.  The corporate tax being lowered to 15%.  I explain over and over what this would do.  This would make our country the most desirable in the world...creating thousands of REAL jobs, bring our manufacturing base back, and expand the tax base.  It is so easy to understand...but when I explain it to these dumb fucks...their eyes glaze over.  I don't get it.  How hard is it to understand?  AND THAT IS JUST ONE ISSUE.....

Hitlery_4_Dictator's picture

Looking for any man to save you is a fool's errand, look up for your redemption draws near. 

JR's picture

I'm with you on Trump, Takeaction, but as for taxing U.S. corporations, the truth is they get a huge pass on income tax.

Chad Stone, chief economist at the Center on Budget and Policy Priorities, wrote on Nov. 13, 2015 in US News that those who complain that US corporations pay more taxes than the rest of the world either are uninformed or disingenuous. Why?

Wrote Stone, “As my Center on Budget and Policy Priorities colleague Chye-Ching Huang says here, the big problem with taxing multinationals today is ‘stateless income’: profits that aren't taxed anywhere.”

For example:

“In 2014, Pfizer reported $3.1 billion of tax obligations worldwide and an effective tax rate of 25.5 percent. That's well below the U.S. statutory rate, but Pfizer actually paid less than $1 billion in taxes for an effective rate of just 7.5 percent. The difference between its tax obligations and tax payments lies in the profits Pfizer has not yet repatriated – and may never repatriate – and hence profits on which they haven't paid taxes."

U.S. average corporate taxes are low by international standards; the average corporate tax rate (2000-2005) in the U.S. was 13.4%, lower than Australia, the UK, France, Portugal, Belgium, Spain, Japan, Finland, the Czech Republic, Denmark, Greece, Canada, Switzerland, and Korea. These are statistics from the Center on Budget and Policy Priorities.

This is according to the Center on Budget and Policy Priorities on February 14, 2012

sun tzu's picture

You're mixing millions of small and medium sized corporations with the Fortune 100. Not every corporation is a multinational worth $50B and has a team of 1000 tax attorneys.


Most small and medium sized corps pay the full 35% tax rate while Google and GE pay 2% due to parking their profits offshore

herkomilchen's picture

The Ring of Power, violent rule by some men over others, cannot be used for good.  Its very use is inherently evil.  The ring corrupts anyone who places it on his finger and attempts to use it, regardless of his intentions.

philipat's picture

The Fed was planning that, as usual, they could rely on the TBTF's and the MSM to cover for them for saying one thing and doing something else? They needed to absorb about $1 Trillion in liquidity to enforce the "Rate Hike" and they actually did NOTHING. So this is, as usual, all smoke and mirrors.

But the good news is that this time, the Fed's "Credibility" is being exposed for all to see. If they can't even implement a 0.25% rate hike and then must take it back and implement QE4, what does that do to their "Credibility"?

New system anyone??

HopefulCynic's picture

US workers are lazy, and feel entitled. 

Vlad the Inhaler's picture

All you folks who love to blame the government, this is a perfect example of why you need to blame the companies themselves, and look what states have the most H2...

NotApplicable's picture

They both are parts of the same parasite, fool. Honest businesspeople cannot compete with the criminals getting free cash from the Fed, which they then use to buy up everything (including politicians) in order to further stack the deck to their liking.

Complaining about which part of the parasite is the problem is to fail to understand the whole parasite.

bonderøven-farm ass's picture

Vlad, there is no partition between the state and the corporation.


Sanity Bear's picture

A corporation is fundamentally a state entity.

ThroxxOfVron's picture

'Window dressing' = cooking the books ( while the regulators watch ).


The Commercial Banks are firmly in control of The FED.

'TBTF' Banks and their cronies and associated commercial industries will continue to enjoy ZIRP while the Main St. economy is starved of capital and credit and the general citiaenry charged 12% to 24% to borrow with their CCards.. 

glenlloyd's picture

This sort of stuff should suprise no one.


Al Tinfoil's picture

To Wulfkind:

The $15 per hour minimum wage will cure this, surely.  And all corporations will swallow the increased cost of labor, and put up with all the lawsuits alleging worker abuse, non-payment of wages and overtime, poor living and working conditions, discrimination, etc., etc.   

Or maybe the farms in the USA will be shut down and all the fresh food production moved to Mexico and other places in Latin America.  Then the corporations can pay even less in wages, not bother with working and living conditions problems of their workers, not be bothered with lawsuits, and pay bribes to bureaucrats in pesos instead of dollars.  Then the fields in Georgia and elsewhere can be turned over to highly-mechanized, non-labor intensive production of GMO corn, soybeans, cotton, etc., and many more millions of gallons of pesticides and herbicides applied by machine or airplane.  The chemical and GMO companies will be happy.

Putting aside sarcasm and tongue-in-cheek, in the globalized business world we now have, it is hard to see how American farms and American workers can be isolated from competitive pressures from outside the USA.  And with regard to allegations of corporate scofflaw practices and bureaucratic corruption, what else should be expected when there are so many examples of such bad behavior among our leaders in government and business?  As the old saying from China goes; "A fish rots from the head".  And there seems no question that American businesses operate in a minefield of regulations, taxes, and rampant litigation, while they see successful businesses employing lobbyists to give "campaign contributions" to politicians in order to go unmolested.  And heaven help any business in a sector that becomes the whipping post for some social justice or environmental action campaign, like coal mining. 

I know of examples of businesses that were run ethically and followed all the rules, only to be driven to the brink of bankruptcy be competitors that cut corners and profited from unethical and even illegal practices.  I have great sympathies for workers caught up in these competitive struggles among their employers, and little sympathy for corporate suits that hide behind the corporate shield while acting like scumbag shills, but at the same time stories like "Americans, You're Fired" need to be balanced by viewing the situation from the employer's perspective as well.

Wulfkind's picture

I have absolutely ZERO pity for the employers.  They have failed 3 different ways to solve this issue.

#1:  They failed in voting the bastards in.

#2:  The ones who DIDN'T vote the bastards in, they failed to vote them OUT.

#3:  They've always had the last option that our Founding Fathers had.  The gun.  And they've failed at that.

So fuck the employers and fuck the companies.  Because of their cowardice and failure we are slowly, piece by piece, legislation by legislation getting the Socialist hell hole we've been warned about because Americans are getting sick and tired of getting fucked in the ass by employers and business no matter what the reason.  And blaming the government is wearing WAY thin.  So.....the people are voting for the liberals and socialists.  It's the WRONG thing to do.....but desperate, angry people will do some stupid stuff.  Same as it ever was.

Inaction has consequences.  And when the American People did not rebel with armed force when in 1913 their elected officials passed both the Federal Income Tax ( federally mandated theft ) and the Federal Reserve ( federally mandated Ponzi scheme ) the stage was set for what we have now.  The Civil War took the fight out of the American People.  The Civil War was the death of America and freedom.

Al Tinfoil's picture

The last 30 years has seen:

1. Multinational corporations co-opted the US government; 

2. The US government entered into "International Free Trade Agreements" that were sold to the American people as "opening foreign markets to American-made goods" when in fact these IFTAs allowed the US-based multinationals to move their production facilities and jobs offshore while still having free access to sell goods in America.  American labor laws, environmental laws, and litigation were sidestepped, and American manufacturing employment tanked.  

3. Employers and workers on American soil were left to fight it out in the new globalized economy.  The result has been a "race to the bottom" as we were warned would happen by pundits talking about NAFTA and GATT in the 1990s.  Unions and wages have been devastated.  Older businesses operating in the US, and city and state governments, face bankruptcy over retirement packages and legacy expenses, while multinationals that "offshored" face no such problems.  "Full-time" jobs in the USA are often limited to few enough hours per week that the employers escape the Obamacare mandate to pay for workers' medical premiums.  More and more, employers want to employ "temps" or use labor contractors so that the employer escapes long-term commitments for employees.  Falling pay levels translate to lower yearly average earnings and a hollowing out of the Middle Class.  Not a pretty picture at all.

4. I do not condone unethical or illegal behavior by employers or anyone else.  But employers in the USA no longer have the easier atmosphere of the 1950s and 1960s when they could operate as the "town mill" and residents could always get a job for life at the mill and retire after 30 years with a company pension that promised a reasonable standard of living.  The 1970s saw the devastation of much of US manufacturing, with the "Rust Belt" phenomenon in so many states. The economic road for US employers and employees has been downhill ever since.

5. American business activity has largely turned away from real business activities like manufacturing to financialization.  The real business center of America has become big banking and playing the markets on Wall Street.  

6. American resident businesses and workers are increasingly left to scramble for the crumbs that are left over after Wall Street and their "1%" cronies have looted the economy.  The expansion of easy credit through bank loans and credit cards, and inflation of house prices, allowed Americans to maintain the illusion of prosperity as they bought stuff on credit and built up huge levels of debt.

7. With huge amounts of money needed to wage a campaign for election to government office, and with the Citizens United decision of the SCOTUS, politics is now securely controlled by deep-pocketed contributors.  This means a few rich contributors and a few large corporations have inordinately large influence in US politics and governments.  To blame all US businesses for failing to vote in better politicians is not correct, IMHO.  Most of these businesses are victims of the situation as much as their employees are.   

Wulfkind's picture

Bullshit that most businesses are victims.  That's why the Founding Fathers gave us the Second Amendment.  When all other measures of good governance have failed.

sun tzu's picture

Don't confuse the multinational corporations with the mom and pop restaurant or dry cleaner. The 2nd Amendment was meant for the government, not your neighbor that owns the local tire or coffee shop.

TheAntiProgressive's picture

If you don't stop the $9.00/DAY shit then your $15.00 simply erases more businesses and designates even more for unemployment and food stamps and many of these potential job hires are so stuck to their "smart phones" the productivity is shit.  You hire them.

LawsofPhysics's picture

So long as people accept the Fed's paper and digital promises in exchange for the products of their labor, the Fed and all central bankers will in fact be just fine.

Same as it ever was...

Ghost of PartysOver's picture

Yep, it is all about the credibility issue.  However, if they do piss away their credibility.......

ZH Snob's picture

they've overcome the need for credibility by entangling the entire world in the dollar scheme.

now, everyone has a vested interest in seeing the ponzi continue.  well, almost everyone.

DeadFred's picture

As long as it is the same as it ever was they will retain their credibility. They are one event away from a total loss of that credibility though. Nuke, flare, quake... lots of possible events flying around now days but we're all good until the first one lands.

LawsofPhysics's picture

Yep, however, it's been this way for quite a while.  hedge accordingly and go be productive in the meantime.  I mean, why the fuck not?  Real wealth does not grow itself after all.

TheAntiProgressive's picture

Yup get on that wheel little hamster and run, run, run, then die in debt after a lifetime of effort chasing dollars created out of thin air.

Booked's picture

"In the land of the bankrupt, the merely encumbered man is king."

kotfare17's picture

It is my firm conviction that there will be agressive rate hikes at each meeting as well as abolishment of paying interest on excess reserves.



LawsofPhysics's picture

You sir/maam, are an optimist.

wmbz's picture

Nice to see a little end of year humor!

mayhem_korner's picture

It is my firm conviction that there will be agressive rate hikes at each meeting...


It is my firm conviction that there will be Potemkin rate hikesTM at each meeting.