Tag Archives: Stigma

Saudi/Fed teamwork

Posted on by

Looks like markets are still trading with the assumption that as the Saudis/Russians hike prices the Fed will accommodate with rate cut.

That’s a pretty good incentive for more Saudi/Russian oil price hikes, as if they needed any!

Likewise, the US is a large exporter of grains and foods.

Those prices are now linked to crude via biofuels.

And the new US energy bill just passed with about $36 billion in subsidies for biofuels to help us keep burning up our food for fuel and keeping their prices linked.

This means cpi will continue to trend higher, and drag core up with it as costs get passed through via a variety of channels. In the early 70’s core didn’t go through 3% until cpi went through 6%, for example.

Ultimately everything is made of food and energy, and margins don’t contract forever with softer demand. In fact, much of the private sector is straight cost plus pricing, and govt is insensitive to ‘demand’ and insensitive to the prices of what it buys. And the US govt. indexes compensation and most transfer payments to (headline) cpi.

And while the US may be able to pay it’s rising oil bill with help from its rising export prices for food, much of the rest of the world is on the wrong end of both and will see its real terms of trade continue to deteriorate. Not to mention the likelihood of increased outright starvation as ultra low income people lose their ability to buy enough calories to stay alive as they compete with the more affluent filling up their tanks.

At the Jan 30 meeting I expect the Fed to be looking at accelerating inflation due to rising food/crude, and an economy muddling through with a q4 gdp forecast of 2-3%. Markets will be functioning, banks getting recapitalized, and while there has been a touch of spillover from Wall st. to Main st. the risk of a sudden, catastrophic collapse has to appear greatly diminished.

They have probably learned that the fed funds cuts did little or nothing for ‘market functioning’ and that the TAF brought ff/libor under control by accepting an expanded collateral list from its member banks.

(In fact, the TAF is functionally equiv of expanding the collateral accepted at the discount window, cutting the rate, and removing the stigma as recommended back in August and several times since.)

And they have to know their all important inflation expectations are at the verge of elevating.

They will know demand is strong enough to be driving up cpi, and the discussion will be the appropriate level of demand and the fed funds rate most likely to sustain non inflationary growth.

Their ‘forward looking’ models probably will still use futures prices, and with the contangos in the grains and energy markets, the forecasts will be for moderating prices. But by Jan 30 they will have seen a full 6 months of such forecasts turn out to be incorrect, and 6 months of futures prices not being reliable indicators of future inflation.

Feb ff futures are currently pricing in another 25 cut, indicating market consensus is the Fed still doesn’t care about inflation. Might be the case!

♥

Share

Re: ffm questions

Posted on by

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

Share

Re: new fed lending facility

Posted on by

(an interoffice email)

> – any chance they would take discount window rate down intra-meeting (or before year end)

seems they don’t have to with this new ‘facility.’

> – have u evaluated the “loan auction” story?

Seems a lot like ‘standard’ repo apart from accepting pretty much anything as collateral from member banks in good standing. This should allow any member bank to fund itself a the ‘stop’ of the auctions, and I’m guessing that stop will be maybe 25 over funds, just to have some semblence of a ‘penalty rate’ though with no ‘stigma.’

Non member banks will still need to borrow from member banks, most likely, and so to the extent they are in the libor basket the libor settings could stay higher than otherwise. Not sure how all that will settle out.

But member banks using the Fed as ‘broker of last resort’ means borrowing and lending with the Fed will keep the names of other banks off their books over year end, and may make room for member bank/non member bank lending. Hard to say, but prospects look pretty good for this to clear up the year end log jam. Also, the ECB could do same with a $ facility which would also help.

Keep me posted if you hear anything, thanks.

♥

Share