Tag Archives: Discount Rate

Fed’s Lockhard on Reuters

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Latest tsy tips results indicate ‘contained inflation expectations’ as well.

I still have that nagging feeling that the 0 rate policy is highly deflationary and without some supply shock, like a spike in crude prices, prices in general will remain weak.

The weak core CPI and high unemployment rate continues to keep a lot of daylight between current conditions and the Fed’s dual mandate.

And the discount rate hike shows an ongoing lack of understanding of their own monetary arrangements.

Up until a few years ago the discount rate was kept a bit below the fed funds rate, which facilitated easier control of the fed funds rate.

This policy changed in a misguided effort to make the discount rate a ‘penalty’ rate which is a throwback to a fixed fx/gold standard paradigm and is entirely inapplicable with our current non convertible currency and floating fx.

All they’ve done by raising the discount rate is make it a bit more problematic to control the fed funds rate should technicals cause a system wide reserve deficiency.

Putting a penalty rate in for solvent banks (the FDIC is charged with removing insolvent banks) having funding difficulties is a throwback to the long discredited and illogical notion of using the liability side of banking for market discipline.

for more detail click here

Subject: Fed’s Lockhard on Reuters

Front end USTs getting very well bid on the back of these comments…

10:11 19Feb10 RTRS-FED’S LOCKHART –

FED PAYING CLOSE ATTENTION TO INFLATION EXPECATIONS

10:13 19Feb10 RTRS-

FED’S LOCKHART – MARKET BELIEF IN HIGH PROBABILITY OF RATE RISE THIS YEAR “OVERBLOWN”

10:14 19Feb10 RTRS-

FED’S LOCKHART – CURRENT POLICY STANCE MORE LIKELY TO EXTEND INTO NEXT YEAR

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Re: ffm questions

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On Dec 18, 2007 1:09 AM, Scott Fullwiler wrote:
> Hi Warren
>
> A few questions on your take on fed funds market data–
>
> Std dev of fed funds rate is way up since summer compared to normal, but
> looking at the high-low numbers, the deviation (at least max deviation) is
> most significant on the low end (since August 15, it’s been more than 0.5
> below the target rate 54 times and more than 1% below 37 times) .  The high
> has only been more than 1% above the target a few times (7), though it’s
> been above 0.5% more than the target 26 times since mid-August (so much for
> doing away with frown costs).
>
> Anyway . . . what are your thoughts regarding how this persistent, sizable
> deviation on the low end is consistent with the story you’re generally
> telling? (i.e., Fed needs to lower discount rate to target and eliminate
> stigma)

Hi Scott,

My best guess is with the discount rate above the funds rate the NY Fed can’t keep the banks in a ‘net borrowed’ position or the bid for funds gaps up to something over the discount rate.  So instead, they are trying to target ‘flat’ and err on the side of letting banks be a bit long as evidenced by funds dipping below the target, and then acting to offset that move.

Also, the NY Fed sets a ‘stop’ on the repo rate when it intervenes, and with the spread between ff and repo fluctuating more than before ‘the crisis’ it may be more difficult for the NY desk to pick the right repo rate to correspond with their interest rate target.

When the discount rate was below the ff rate it was a lot easier – they just kept banks net borrowed which caused them bid funds up above the discount rate and the Fed allowed them to continue higher until the got about 1/8% above the ff target and then intervene to make reserves available via open market operations at the equiv. repo rate.

The NY Fed isn’t saying anything about what they see happening, and why there is so much variation, which doesn’t help either.  Here’s a spot where a little transparency and guidance can go a long way.

Further thoughts?

Warren

Is it as simple as saying there’s a lot more uncertainty in money
> markets and regarding the Fed’s reactions to the uncertainty?  Perhaps,
> since the effective rate has been above the target (37 times) almost as much
> as below (45 times).
>
> Thanks.
> Scott
>
> —
> ******************************

************************
> Scott T. Fullwiler, Ph.D.
> Associate Professor of Economics
> James A. Leach Chair in Banking and Monetary Economics
>
> Department of Business Administration and Economics
> Wartburg College
> 100 Wartburg Blvd
> Waverly, IA  50677

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Re: credit recap

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(an interoffice email)

>
>
>
> Mkt did not like the Fed move today- IG9 went from 70 out to 78.75 after the
> news. CMBS cash (which had a roaring spread tightening in the morning of
> about 15bp) gave all but 6bp of it back. There was a rumor this AM that
> JPM is taking a look at Wamu, but nothing official materialized yet.

Thanks, watching to see if the tightening resumes after this afternoon’s ‘reduction of risk’ reaction to the fed report.

>
>
> General Credit News
>
> The US Federal Reserve cut the Fed Funds Rate by ¼ point and the discount
> rate by ¼ point. The market sold off due to discount rate cut being less
> than expected (people expecting a ¾ point cut). Also, the fact the Fed
> maintained concerns about inflation worried people.

Yes, the media had convinced everyone they didn’t and shouldn’t care about inflation.

>
>
>
> The CEO of the Dubai owned investment firm Istithmar PJSC said that US
> financial and real estate companies are at “attractive valuations” after
> their shares fell on the subprime mortgage crisis. The CEO said, “We feel
> there’s been an overreaction and the market has not yet separated the wheat
> from the chaff.”

Agreed!

>
>
> German investor confidence dropped more than economist forecast in December,
> reaching their lowest level in almost 15 years as rising credit costs dimmed
> the outlook for economic growth.

They must be watching CNBC, too!

>
>
>
> Homebuilder shares fell the most ever on speculation that the Fed’s interest
> rate cut may not be enough to increase demand for new homes or prevent a
> recession. S&P’s measure of 15 homebuilders dropped 9.7% today after the
> Fed cut rates by ¼ point.

Overreaction is my best guess.

>
>
>
> Citigroup Inc. (C): Board appointed Vikram Pandit CEO.
>
>
>
> Fannie Mae (FNM): CEO said the US mortgage and housing markets are unlikely
> to recover until at least 2010.

May not go through old highs until then, but should be bottoming somewhere around current levels of activity.

♥

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Discount rate

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Seems the fed now has some current evidence of how the discount rate can ‘cap’ year end funding costs for member banks if they remove the ‘stigma’ as recommended.

Lending at the discount window jumped to $2.15 billion on Dec. 5, the largest since September. It was the first period that covered the year-end and rates at the discount window were lower compared with the market, which may have led to increased borrowing.

♥

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Fed’s best move

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From the Fed’s theoretical framework, their best move is:

♦ Cut the discount rate to 4.5

♦  Leave fed funds at 4.5

♦ Remove the stigma from the window

♦ Allow term window borrowing over the turn

♦ Accept any ‘legal’ bank assets as collateral from member banks in good standing

♦ Allow member banks to fully fund their own siv’s

♦ Do not allow banks to do any new sivs or add to existing siv assets, and let the existing assets run off over time.

This would:

♦ Close the FF/LIBOR spread stress for member banks

♦ Support market functioning

♦ Support portfolio shifts to the $

♦ Temper inflation pressures

♦ Restore confidence in the economy

♦ Regain Fed credibility

♥

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