This page has been archived and commenting is disabled.
Yellen, You Have A Problem: The "Rate Hike Corridor" Just Broke
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.
- 253 reads
- Printer-friendly version
- Send to friend
- advertisements -







"Americans, You're Fired"
Shocking ( or maybe not ) Buzzfeed report
http://www.buzzfeed.com/jessicagarrison/all-you-americans-are-fired#.diM...
Oh Snap!
that buzzfeed article is a month old...
and yes, it's some real journalism, by buzzfeed, that's how far we've fallen...
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.
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?
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...so 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.
My heart agrees with you, but I still have a little hope that he will follow through. I am all in on TRUMP.
Janet's will, stupid promises on "draining liquidity" vs.
Bond & Money Markets
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
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
Hope in one hand, shit in the other. Which fills up first?
It's all shit.
Unless, you rest your reality on the agitprop of the Treasury Department.....
Q: Who protects Trump?
A: Israle Zionists including the Clintons.
Why people want to be led , like, by a shephard....is a mystery. /s/
RIPS
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.
The genepool needs some bleach.
just mix with 3rd world countries and voila
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.)
the Zapruder Film
https://www.youtube.com/watch?v=iU83R7rpXQY
Tall Tom
It is REFRESHING to see that some understand just how the system works.
Keep up the good work.
This is bullshit! Presidential nominees are already part of the establishment. A person can not become a candidate unless he is cooperating.
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 leader...here 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.....
Looking for any man to save you is a fool's errand, look up for your redemption draws near.
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."
http://www.usnews.com/opinion/economic-intelligence/2015/11/13/reality-check-on-corporate-income-tax-rates
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
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
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.
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??
US workers are lazy, and feel entitled.
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...
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.
Vlad, there is no partition between the state and the corporation.
A corporation is fundamentally a state entity.
'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..
This sort of stuff should suprise no one.
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.
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.
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.
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.
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.
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.
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...
Yep, it is all about the credibility issue. However, if they do piss away their credibility.......
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.
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.
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.
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.
"In the land of the bankrupt, the merely encumbered man is king."
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.
You sir/maam, are an optimist.
Nice to see a little end of year humor!
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.
"It is my firm conviction that there will be Potemkin rate hikesTM at each meeting. "
Precisely. It's bullshit. When it's time to cook the books for the quarter/year the rates are what the Banks want them to be. The debt which is actually being Repo'ed is probably of maturity terms such that it also provides a guaranteed vig vs. THe FED's 'curtesy' Repo rate.
rate hike is a FAKE
Just like everything else in the financial markets....
Bonuses are real....
......and so was the moon landing.
That's what everyone is saying. Lately everyone has been wrong on fed. Time will tell, but fake might take longer then we think.
Of course it is. What is there about this shitshow that isn't fake?
Well,the fraud and theft are real...
They were supposed to remove 800B in liquidity from the system but ended up increasing liquity when the market tumbled. Look at the fed balance sheet. It actually got bigger after the rate hike
Correct, and with the chinese printing even faster, we are moving exponentially closer to global Weimar.
Bingo. Eventually, it will in fact be Global Weimar.
Now it all makes sense... they thought the forecast was for global warming, but in fact it said global weimar.
overnight lending had the highest rate so far this year today. actually so far this last 4 years...
http://www.dtcc.com/charts/dtcc-gcf-repo-index
http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html
Drink In The Recovery with a New Years Eve Olde English 800.....
Lordy... Threw up more times than I can count on that stuff. The first two or 3 ice cold ones were great though...
Da Beer Bettys Take On Malt Liquor
https://www.youtube.com/watch?v=geSHWN9sZ-Y
A Bucket of Chicken and 40 oz of Malt Liquor
https://www.youtube.com/watch?v=gcinwdIqXtU
8 second 40 oz Malt Liquor Chug
https://www.youtube.com/watch?v=3cJHGStGfRY
The market- if there was one- sets the rates, not the federal reserve. Since they manipulate most things, they are finding that they cannot raise rates while still plunging money into the marketplace. They say raise rates, but they do easy money. Of course banks won't voluntarily pay more for money. They will take the easiest gains.
Ain't a real rate rise until liquidity is properly drained.
This is merely financial theatre of the highest order. All we're lacking is some incense, incantations and the waving of a monstrance.
I am sure that the incense, incantations and waving of a monstrance all occur in private.
-Also a big fan of Dune.
the rate hike is nominal. for those who may not know, nominal means not really, it's just a name.
nominal target. <stay on target, stay on target...>
You mean it is a 'symbol' of what it should be.....
http://www.merriam-webster.com/dictionary/nominal
I made a bet with a co-worker the FFR would be below 0.25% by year end. Looks like I'll get to collect!
I do/did not understand why the FFR jumped to 0.37% after the meeting. If the RRP was only getting ~$100b - $300b in offers and there are $2,600b in excess reserves in the system, why did the FFR ever move higher? Similar to pissing in the ocean. Perhaps someone could explain this? (Other than the posted FFR rate being for show only.)
It seems to me the only participants that benefit are those that could lend to the Fed at the high rate. (The other $2,500b gets a much lower rate at/near 0.15%.)
It is money market funds doing the RRPs with the fed and collecting the 25 b.p., not the banks who are eligible to receive 50 b.p. in IOER. As the MMFs do more RRPs with the Fed it drains liquidity from the banks by decreasing the banks excess Fed reserves, though only for one day if the RRPs are not done every day (which so far they have been).
The only entities lending fed funds these days are the entities not eligible to receive IOER on their fed reserves (e.g. Federal Home Loan Banks).
Thank you for your insight Raccoon! It's much appreciated. (Are you related to the Rocky Raccoon that used to post? If so, tell him I missed his comments.)
correct. So far the MMFs are still "in the club". Want to see social unrest on a scale never before seen? Kick the MMFs (all the sheep's 401ks) out of the club...
go ahead Janet, I triple dog dare you!!!
Yellen, you failed!
You failed your Highness. I am a Jedi, like my father before me.
So be it, Jedi.
(#4 worst acting moments from the original Star Wars trilogy. #1 is Mark Hamill's "That's not true!" embarassment.)
The only reason there is a fed funds "market" at all with $2 trillion in excess fed reserves sloshing around is the arbitrage by certain banks of Fed funds held by the limited number of entities not entitled to receive IOER on their fed reserves. That there is no demand for this arbitrage on the final day of the quarter may simply indicate the arbing banks may not want to show this activity on their year end balance sheets.
Yellen will have to reincarnate Operation Twist. /LOL
KoRn - twist
It is all PSYOPS.
The rate hike corridor plunge protection team will get right on that.
13 week treasury dropped as well: http://finance.yahoo.com/q?s=%5EIRX
Is there a granular enough view to see which happened first? Did the Fed Funds rate drop first? Or did the 13 week treasury drop first? I suspect it all happened over night with some conversation between the Fed and whoever dominates the 13 week treasury market.
Looks like the Fed is back to their old financial engineering tricks. This is why the Fed needs more oversight and actually be audited.
As I said since 2009. There is no free market. Just the Fed !
How convenient that such a "glitch" happens on 31st of December. It seems pretty fucking certain that the FED funds rate on the last day of the year is used for some really important valuation purposes on some really massive balance sheet items all over the world. Everybody will put this value in their model as the official one for the year 2015, no?? And all the FED has to do is make it look like a temporary computer error thing ("oops, we'll correct it on January 3rd as soon as the markets open, sorry guys") and of course get the mass media on board to spin the story accordingly (if at all necessary, because who gives a fuck anyways on December 31st?).
What a joke.
We now have the proof that there is something so big out there that the FED cannot hike rates at all, not even by 25bp.
Dude, I think you nailed it.
Oh, and they can blame it on Rooskie hacksters for some extra New Year Chee... er., Fear.
I'll bet five bucks the thing boners back up to it's "new normal" state. I wouldn't be surprised at quarterly ejaculation and re-bonification cycles either...
Great comment btw, and thanks to the Tylers for piece - great expose.
You looked behind the curtain.
There is ALWAYS an apology...afterwards.
Well if our ZIRP didn't work, just wait 'til we unleash out NIRP.
if first you don't succeed in destroying the financial system, try, try again.
What I don't get done during my rein, my successor will finish it (you) off. Get your financial affairs in order cuz 2016 gonna be a shit show you won't believe.
The .12% open and trading level for fed funds is meaningless today. It is solely a reflection of too much cash chasing too few bids on the overnight mkt:
1) daily borrowers in overnight euro-dollar and fed funds mkts retreat from the mkt on quarter and year-end in order to NOT inflate their balance sheets. Since most borrowers are just arbitraging the IOER day-to-day they can step back from the mkt and not have any real funding shortage.
2) the mutual funds who daily fund these arbitrageurs are left with fewer counterparties to sell (invest) their excess cash to. the funds then turn to the fed rrp program to take up the slack.
Today's stupid low funds rate and later the massive RRP look like "x" sigma events but really will be nothing out of the ordinary of daily moneymarket liquidity plumbing.
So you're saying the fed funds rate on December 31st of each year is strictly used for daily transactions on December 31st?
I'm really not an expert on this (as you may have noticed by now), but I'm having a hard time believing it. What about the mortgage rates for example? What about the valuation of the US-treasury bills? What about the financial services provided by the BIS?
And of course what about the hundreds of trillions of notional value in derivatives? Absolutely no where in any model you need to enter the value of the fed funds rate on december 31st of each year?
Most importantly, what takes place on the last of every quarter? Why a snapshot of bank balance sheets for regulatory and public filing purposes. This "non-event" confirms banks can not stomach even a 25 bps move.
That's an excellent question Tyler and i've been wondering the same for much of the last 30 years i been a short date liquidity broker.
the only real answer is that the banks don't want it that way (you'd have thought Lehmans Repo 105 woulda changed that). They play the game for ~89 days each qtr then sit on the sidelines for 1. Then right back into the mix on the first of each year or qtr.
End of quarter balance sheet window dressing is very common in *ALL* public companies.
Very true. In this case they're dressing the balance sheet down so they can maintain their Tier 1 capital ratios, which is fine if they run into a problem on the last day of each qtr or year end. The problem is that the rest of the time they're levered up way beyond what their capital structure can support.
Caveat emptor.
Well, ask yourself where Apple and MSFT and all the other "cash rich" companies are putting their billions of "liquid assets" all 365 days of the year... sure as hell not in T-bills
Don't think Tier 1 capital ratios matter. Too many ways to mess with numbers, too many ways for a bank's lobbyist to have their Congress member order regulators to back off, and when that doesn't work -- do like Henry Paulson and order FASB to change mark to market accounting rules.
But due to netting rules and how things settle at custodial banks, the money center banks tend to know each other's real numbers (minus the accounting gimmicks) at the close of every business day. That part matters a lot
"The problem is that the rest of the time they're levered up way beyond what their capital structure can support. "
Indicating that this is an indemic/epidemic problem throught the system.
The TBTF institutions and their attendant systemic counter-party risk fragilities have not been deconstructed and alleviated.
They CAN stomach it. They just don't want to. Banks aren't charities.
Correct, they're theiving, underhanded jackyls hellbent on extracting every ounce of wealth and profit from their patsies, uh i mean clients.
LOL!!!! PLease, you stupid fuck, banks no longer actually do any real work or face any real risk...
shut down the fucking printers and make the fuckers have to actually work for a living again motherfucker!!!
"This "non-event" confirms banks can not stomach even a 25 bps move."
1. The accounting fraud must be reflected on both sides of the balance sheet.
2. It may be that The FED is simply actively gifting the Cartel Banks free money by lowering the cost vs. the rates/terms available via other dated T-Bills, High Yield Credit, Derivatives or Securitizations, etc..
@Bernoulli:
There is something like $200T of notional value of derivatives sloshing around the globe.
A. For what portion of those derivatives do you think the TBTF banks are the marking counterparty?
B. How much difference do you think a 23 basis point difference in the "risk-free" rate makes on those marks?
Yes, the fed funds rate is the price of overnight (from one business day to the next, whether 1 day, 3 day or longer, as long as the maturity is the next businessa day) money. So all fed funds trades (effectively loaning money between counterparties) today will mature on Jan 4, 2016.
Yellen exclaims, give us one more time. We figured out the formula. Lagarde is coaching us.
We have been reviewing the CPMI database and think we can come out as a winner this time around. This shit writes itself.
31 Dec/Statistics on payment, clearing and settlement systems in the CPMI countries - Figures for 2014
If they drain too much liquidity, the markets will implode. The Fed is still effectively stuck in ZIRP. By this time next year, we will be in NIRP.
Give that man a cigar.
$9T+ in bail out liquidity and still not out from under. Those that felt liberated just re-bubbled what they could.
Let's see if the central banking sector grandfather's themselves into the fixed rate for borrowing, so dealer's can advance artificial gains.
I'll take "Short the March 31, 2016 Fed Funds Rate" for $500, Alex.
Investment bankers will take "It no longer matters" for $500 million, Alex
As I've stated for a long time. The fed hasn't changed anything and won't.
What has changed is the market. Broker-dealers are a side show now and MMFs (RRPs with Fed) play as a big a role as banks (reserves with Fed) do in funding. Fed funds is a bank rate that is pushed around by RRP.
What has changed is that the non-bank system is now many times bigger than the buggy whip banking system that the Fed (supposedly) controls.
The last time the Fed tried to keep interest rates artificially low (in the 1970s) -- Eurodollar deposits became bigger than US deposits. This time, the dislocation was much bigger; the Fed won't have much influence going forward.
Any idiot could have seen this problem coming a mile away (and lots of people did, and warned about it for years), but Bernanke is a clueless academic with zero real world experience.
The Fed and the US economy will be paying for Bernanke's incompetence for many, many years. Its nice that the muppets are starting to realize how screwed they, but Bernanke already has a cushy pension. If you wanted to stop him, the time to do so was years ago.
https://hat4uk.wordpress.com/2015/12/23/modern-toss-more-recipients-of-t...
QUOTE
halfkidding
December 24, 2015 at 1:11 am
Well for meaninglessness you can’t do better than the Fed setting the target for the Federal Funds rate. That is because with With $2.8TN of bank money deposited at the Fed as ‘excess reserves’ there is no need for overnight lending between banks and so there is no Federal Funds market. They have more funds than they know what to do with. If a bank actually has to be in the Fed Funds market it’s probably near failure. The approximate $50bn nominal total being shown as typical volume now is probably just banks doing the Fed a favour and using the Fed Funds ‘market’ just so everyone can pretend there is a Fed funds market. For some perspective in 2008 the Fed Funds market had activity in the $400bn range typically.
Nothing says free market more than the Fed pretending it can raise rates by ‘setting’ the rate of a market, the Fed Funds market, that doesn’t actually exist. As a measure of the Feds power to ‘set’ market rates, 3 weeks ago 4 week T Bills are trading at 22 basis points and as of Tuesday were trading a 20 basis points.
Behold the power!
The Fed tried to solve the terrible problem of way too much debt with even more debt. Absolutely Brilliant!
Okay, I'm a C student and raising my hand to ask some stupid questions here. There might be others in the class as clueless as me. Can someone explain:
1. If the Fed wants rates at 0.25 and the banks would only pay 0.12, then the banks didn't reduce liquidity as much as the Fed wanted to, is that correct?
2. If #1 is correct, how much liquidity did the Fed think they could suffer - is interbank lending really all that much money in context of the liquidity?
3. If the banks will only give 0.12 percent when the Fed wants 0.25 percent, how does that work? Can't the Fed just say "0.25% take it or leave it"?
4. In any event, what's this mean to little old me?
Thanks teachers!
The Fed tried to "solve" a problem of too much debt by encouraging, and eventually requiring, even more debt.
Imagine "saving" a pool drowning victim by shooting a firehose into their mouth. Technically, the victim is no longer drowning from pool water (they are dying from inhaling hose water instead). It all depends on what you think the meaning of "is" is.
With QE and ZIRP, the Fed gave up control of the money supply (and with it, interest rates).
And just for the record, QE and ZIRP had already been failing in Japan for 15 years when Bernanke decided to do the exact same thing in the USA.
The question is not "why isn't it working?" The question is how stupid does anyone have to be to think the same dumb policy would somehow produce different results?
Not an expert in money markets...
Fed buys/sells money as another party on money market and this is how it regulates overnight rate. Banks need to keep a certain pool of money overnight with Fed. If they do not have money, they will borrow, if they have too much, then they lend.
The rate being too low means that banks have too much money to offer for lending. If this case, to keep market rate up, Fed traders must borrow all of this ...
FRBNY could be entering these reverse REPO agreements with no intention of buying them back thereby tightening the money supply. This is the mechanism used to raise interest rates. Make money scarce. The major players, primary dealers who are in essence shareholders, owners of the FRBNY, won't be affected, of course, the rest of the the pack will get stuck with these securities w/ nowhere else to sell. When firms run out of counterparties to REPO agreement, reserve or otherwise, their balance sheet is exposed.......bankruptcy and liquidation follows. Then the owners of the FRBNY get to buy up all the assets on the cheap, hang everyone, not in the club, out to dry then rinse and repeat.
A full scale world war is the only way out of this mess or, we could instead, force the FRBNY to expose their books and force them into bankruptcy and liquidation making war impossible to finance.
The BIS would never allow the FRBNY to go down so total world war is the only option. This time the USA will not fair as well.
The Chinese could easily send the world into chaos by short selling their U.S. Treasury holdings. Markets could not withstand the shock and the FRBNY would not, could not, survive.
That is why I keep $10,000 set aside in rmb, even though it has taken a hit since the devaluation, in a Yuan denominated account. I wish they would fck us over. We certainly deserve it after all the chaos we have caused in this world in the last century.
I want to ask a really basic question, a previous comment stated:
It is money market funds doing the RRPs with the fed and collecting the 25 b.p., not the banks who are eligible to receive 50 b.p. in IOER. As the MMFs do more RRPs with the Fed it drains liquidity from the banks by decreasing the banks excess Fed reserves, though only for one day if the RRPs are not done every day (which so far they have been).
The only entities lending fed funds these days are the entities not eligible to receive IOER on their fed reserves (e.g. Federal Home Loan Banks).
Does this mean that effectively there are no "excess" reserves? If so - are we saying that any "excess" is used to prop up non performing loans?
When you all talk about lack of liquidity - is this where the supposed liquidity is locked up? Propping up NP loans on the books?
Excess reserves only exist in "traditional" bank balance sheets. The so called "non-bank" banks, where most credit creation took place, do not have any excess reserves.
Instead of focusing on what CNBC says, look up interest rates being paid by real borrowers (eg bankrate.com or the Wall Street Journal markets page).
Real world borrowers (consumer and commercial) have been paying a lot more than 0% for years. Big corporations have been borrowing from insurance companies and money market funds (eg NOT banks), above 0% for years. Commercial paper is generally linked to eurodollar rates, not FF.
As for your other question (whether traditional banks are holding excess reserves against NP loans)... out of my area, but a lot of banks sunk a lot of money into high yield shale oil drillers. The loans are "secured" (not really) by drilling rigs (which everyone is dumping) and any oil stored in tanks (see the price of oil now versus a year ago). If there are any bank credit department people reading this, they are probably not allowed to say how these loans effect their employer's solvency status
The scam is so obvious its almost comical. I can't believe how easy it is to swindle the entire globe and not only get away with it, but have 99.99% of the victims not even understand what the fuck is happening to them.
You can't even make this shit up.
Not so hard to believe after watching this short clip asking Americans to name a country that begins w/ the letter U!
https://www.facebook.com/muhammadali.mars/videos/1158692044637/
There is no hope. Time to thin the herd imho!
The Truly Big Shorts
https://www.linkedin.com/pulse/truly-big-shorts-john-m-cunningham?trk=pu...
I'm not naming names, but it looks like SOMEONE forgot to sacrifice the chicken.
Reverse repo is the Fed lending more to the market, not? Meaning it is the same as short time quantitative easing. Help me if I am confused.
Yep. Covert QE.
Other way around. Quantitative Tightening. Soaking up cash, counteracting previous Quantitative Easing:
https://www.newyorkfed.org/markets/rrp_faq.html
These securitys will never be bought back by the FRBNY. They are finally soak up all that money they printed. The mechanism they use to raise rates by making currency scarce.
Rates, in the not so distant future, will make Volcker look small time. I'll bet rates go up to 25% again to soak up $250 trillion.....that should take a while.
The bonds are bought back the next day. Then the process repeats. The repurchase agreements are overnight in duration.
The only way they can raise rates is by welching on the deal though. The old bait and switch. How else they going to do it?
I always thought these operations were used to remove garbage from the balance sheet, fraud, chicanery, to cook the books.
Isn't the REPO the device that fried Lehman? They did it everyday to put lipstick on the pig to hide their trash. When the REPO counterparty's disappeared the tide, finally, went out.
I assumed this would be the first target by the Senate Banking Committee after Lehman but, I never heard a whisper about it. REPO is what caused the Great Recession. When counterparty's disappeared, and no one would do any short term lending, the balance sheet was exposed as it truly was.....fraud i.e.
If you don't give the junkie the drugs, they will break into your house and take them.
The fed is merely reactive to any issue that requires them to change course to ensure windfalls for the owners, which tragically due to the way the institution is built means pain for everyone else. Sometimes there is a big obstacle and it might look like they are once again moving in the right direction when in fact it is just a problem they need to sail around to maintain optimal long term wealth extraction.
2015: The Year in One Breath from MarkFiore on Vimeo.
The PPT will be working lots of OT in 2016
I just hope that when all of the Keynesian madness fails they bring back the $1000 bill for the helicopter drops with some $10,000 bills intermingled.
And, I hope that they have the quintillion dollar bill designed and ready to print for the endgame.
Did i told you NIRP coming to your nation in 2016 (after new year hangover are over), dude?? Not that i smart. But that is what your vassal nations (EU/JA) did already. And your FED'S would USE THE SAME (FAILED) MEDICINE on you, dude. Doesn't matter what is the outcome (you alreasy know).
Look, by this time? ALL OF YOU that reads ZH, should already know (i surprised Tyler haven't you, yet).
1. YOU WANT FREE TRADE.
2. Free trade, can only BE BALANCED, IF, those in ALL COUNTRIES that DO Free trades, are all AT THE SAME LEVEL GDP number (the difference should be negligible)!!
3. You CAN NOT EXPECT, when you do free trade to a country that have GDP of 246$ to yours that at 56,000$ level? The trades WOULD FAVOR THE LOWER GDP country!! (I saw the problems, when your govt forced CHINA to joins for free trades agreements back in the 90's).
4. Business ALWAYS LOOKING FOR MORE PROFITS!! That is THEIR NATURES!! You can't blames them, then if TYEY BUILT FACTORIES in the LOWER GDP COUNTRIES, cause that means, they have LESS COST to produces something, and STILL CHARGED YOU the same price (or a little bit LOWERED), and they gets MORE PROFITS, for the SAME EFFORTS!!
How the hell you STILL CAN'T SEE IT!?
- - -
What you see currently on EU/US/JA Central Banks? (And to a degree to world's CB)
Is a FUTILE EFFORTS to MAINTAINS YOUR GDP LEVELS!!
Would you Americans, instead of having 56,000$ salaries, do you want to live with 246$ per month salaries? I don't think so. And that's WHY your govt creates debt like there's no tomorrow!!
However,no matter what your govt do? It won't work!! For a very simple reason, IT IS MORE EXPENSIVE TO MAKES SOMETHING IN A COUNTRY WITH THE HIGHEST GDP NUMBERS!!
But what about German, you said. They are STILL competitives!! Well... have you seen their lowest price products? Made by ROBOTS than need only 5 (five) workers to control. I say Natgeo/DiscNet that shows a Porsche Part Centre that is FULLY AUTOMATED BY ROBOTS, right into placing labels on the box for shipping companies. NOT A SINGLE HUMANS were on the building, except for the control room. (And that's why, ZH article CORRECTLY POINTED OUT, that robotizations is coming to the US!!).
Now, WHY THE DM CB efforts WILL/ALREADY FAILED?? Cause unless you at the DM world, wants to coming down to China living standards?? You will not WINS against China manufacturing levels!!
And as you read in the ZH numerous articles? Your LIVING STANDARDS IS GOING DOWN!! Just look at your salaries, your infrastructures, and your cost of living.
And you are too idiots also, by acting like your govt, by offsetting your lowers incomes, by MAXING OUT YOUR CREDIT CARDS DEBT!! How much stupid you have to be??
So, now you understand what you have to do to protect yourself?? Lower your GDP. Or? Stop int'l FREE TRADES (and makes numerous bilaterals agreements based on disparity of GDP levels. AND? Stop migrations to the higher GDP countries. Cause lower GDP country citizens? Would be enticed to living in the higher GDP countries).
It's quite an "IMPOSSIBLE CHOICES" eh, for you in the DM world?? See HOW IMPOSSIBLE IT IS TO BE DONE IN REAL LIFE??
So, NO MATTER WHO YOU CHOOSED AMERICANS? IT DOESN'T MATTER. CAUSE THE ONLY WAY YOU CHOOSE TO SAVE YOUR ASS? INVOLVING PAINS THAT MUST BE SUSTAINS BY YOUR OWN (AS CITIZEN).
Stop blaming others, other than YOURSELF. You brings this on your own (wanted to have cheaps goods for a living)..
I overheard a conversation between Ben and Janet as they were tranferring power....the room became very quiet when Ben said..."Good bye, old friend. May the Force be with you."
No doubt the Fed will attempt various maneuvres to meet its proclaimed range. We can expect adjustments to the interest rates it pays on requred and excess reserves, as well as administrative measures to compel market participants to cooperate in its efforts. But, IMO, the most effective measure will be to raise the required reserve ratio.