Monday, December 14, 2015

The Fed Makes Itself Irrelevant

Apparently, the Fed intends to announce a policy of paying interest on excess reserve balances held at the Fed.  Since any bank thinking of lending its excess reserves to another bank will do so only if it could earn more than what the Fed is paying, then, almost by definition, the Fed can raise its target on the funds rate.  Whew!

But, so what?

Why would any other rates follow suit?  Most likely they won't.

But, what about repos?  Traditionally funds and repos have been joined at the hip, but paying interest on excess reserves may unhinge that relationship (or lead to a massive amount of excess reserves parked at the Fed as commercial banks arbitrage repos against funds).

But, regardless of what happens in funds/repo land, it is questionable whether other money market rates will be much impacted.  After all the banking system is awash in liquidity, even if the junk bond market is imploding for a lack of liquidity.  The over-kill of Dodd-Frank and the accompanying regulatory straight-jackets have all but eliminated the liquidity safety valves of the investment banks, as is all too apparent in the junk market.

Meanwhile, why is this of interest?  Nothing the Fed can do can get the American economy humming again.  Is there anyone out there who believes that it's inflation-fighting season?

Janet Yellen and the Fed are irrelevant and so also will be their activity on the rate front this week.  Other than the completely irrelevant fed funds rate, no other rates are headed higher, no matter how hard the Fed huffs and puffs.

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