Tag Archives: Target Rate

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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Lender of next-to-last resort?

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There seems to be an alternative to the discount stigma – is the liquidity problem too big for (orthodox) central banks?

The Federal Home Loan Bank System: Lender of Next-to-Last Resort?

Morten Bech, Federal Reserve Bank of New York

When we look at the FHLB balance sheet, we see a $746b surge in net lending to the banking system (at an annualized rate) in Q3. Is it true, then, that banks are suffering from an access to funding? If banks have been shy about tiptoeing to the discount window, they seem to have had no such bashfulness on their way to borrowing or securing advances from FHLB.

How, then, can any Fed official get in front of a microphone with a straight face and say we have a liquidity problem, best addressed by a TAF facility, which at the moment is scheduled to auction off a fraction of that which has already been loaned by FHLB to the banking system?

‘Liquidity’ for fed member banks is about price, not quantity. There is a ‘liquidity problem’ when the term structure of interbank rates isn’t to the fed’s liking.

Currently, the issue seems to be LIBOR – the fed wants the spread over fed funds to be narrower, particularly over year end. The ‘new facility’ should directly address this particular pricing issue.

There is another problem with this injecting liquidity story. If the Fed wishes to maintain the fed funds rate at the current target, assuming the demand curve for reserves remains stable, the Fed will have to remove as many reserves through open market operations as they inject through the TAF.

Yes. Not a problem. The TAF should function exactly that way to narrow spreads above.

If they don’t, the reserves will be in surplus, and the fed funds rate will fall below the target. In fact, the Fed’s balance sheet has been growing relatively slowly, even though they have been easing, especially when compared to the unprecedented expansion of FHLB balance sheet growth.

Yes, again, it’s all about price, not quanity.

The FHLB is acting as a broker – long with some investors/banks/etc and short with others.

♥

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Financing desk comments

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I’m lost for an explanation as to whey the Fed ignored the year end liquidity issue entirely, after alluding to it in various speeches and allowing the impression that they were going to address it at the meeting persist.

Keep me posted as to how LIBOR is over the turn (as well as fed funds over the turn) late morning after the dust settles, thanks. The NY Fed may have something in mind to bring rates more in line with the Fed’s target rate.

♥

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