The FOMC is holding its next regular policy meeting next week. It is widely expected that on December 13 the Federal Reserve’s policy body will vote and publicize the next “rate hike” in its exit strategy. Starting in December 2015, this next one, if it happens, will be the fifth in the series.

It would bring the IOER “ceiling” (or the first of the double floor, as some policymakers try to call it for making it sound like IOER hasn’t been a complete failure from the very start) to 1.50%. In all likelihood the RRP “floor” floor will be raised to 1.25%.

Money market rates typically adjust in anticipation, which is what all central bankers including those in the US wish to see. These adjustments are telegraphed well in advance so the risk of a shock-related disruption is small. Money markets function often as perfect or nearly perfect substitutes, though not always. A cash owner can easily trade between the RRP and treasury bills with little or no change in risk.

Prior to the “hike” in June 2017, the 3-month T-bill rate, for example, had been moving upward since about the end of April. As now, it was expected ahead of time that the June meeting would mark the next policy move. By the time the FOMC did vote for one on June 14, the 3-month equivalent bill yield had been trading for more than a week around and above the 100 bps the RRP was afterward moved up to.

The 4-week bill yield, however, was another matter entirely. It had been consistently in violation trading below the RRP “floor”, thus requiring for the reverse repo always the quotation marks, and in the weeks leading up to June 14 got only about halfway between the then-active “floor” (75 bps) and what was anticipated to be the next one (100 bps). Any time any bill rate, including the 3-month instrument, gets below the RRP it can only be due to collateral considerations (tightening or shortage).

In moving closer to a December “hike”, the June pattern is actively being repeated. The 3-month bill yield has been above 125 bps (the next “floor”) since mid- November. The 4-week is instead once again only halfway there with just a little over a week to go.

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Though that equivalent yield is above the current RRP, that it isn’t above the next one, too, suggests exactly what it did in June. Primary dealer statistics reported by FRBNY do show yet another spike in repo fails. For the week of November 22, total fails (“to receive” plus “to deliver”) reached above $400 billion for the first time since the (Chinese) fireworks in September.

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Though it may seem otherwise, this isn’t at all about “rate hikes” so much as persistent even chronic collateral strain. In other words, the Fed is making its policy decisions in part on monetary capacity that isn’t at all what they think (in parallel to their other primary considerations, inflation and unemployment, also neither of which is what they think). It’s not so much clear policy error as determined ignorance.

Though, we are told, regulations have made it more expensive for particularly dealers to hold bond inventories, that’s exactly what they have been doing going all the way back to August 2007. The shifts in net dealer positions have occurred not on perceptions of interest rates but monetary functioning; therefore, more hoarding (higher net long or reduced net short) coincident to each of the three so far monetary/illiquidity events.

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For much of this year, going back to March, primary dealers are hoarding about the same as they did during the worst parts of 2011 and the 2012 slowdown as well as the “global turmoil” resulting from the “rising dollar.” The question is why.

The answer is scarcity, as in both collateral as well as liquidity preferences that institutions simply refuse to let go of. The lack of quality collateral is as remarkable as, and related to, the lack of recovery. A real economic advance would create its own collateral on increasingly generous terms, at least further greasing the wheels for it as it spins all around the world under redistribution of dealers (both domestic as well as foreign). When you all you have are UST’s, you don’t have much, let alone enough.

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It is as consistent a projection as there can be in any market right now, but one practically no one recognizes. Instead, the mainstream continues to be mesmerized, if still disappointed, by all the “money printing” done, and still being done, by central banks. It is therefore never considered as to why the interest rate fallacy continues forward a whole decade later. Low interest rates, as in the thirties, tell us money is tight not loose (and certainly not stimulus; prolonged low interest rates are evidence of failed stimulus).

What’s notable for the intermediate term is that repo fails, and therefore the unnatural dearness of collateral instruments like T-bills, are escalating again. For the second time in less than three months, repo fails for a single week added up to $400 billion. That is a rarity even for a repo market that going back to 2011 (unsurprisingly) can’t ever seem to get out of the Fed’s way. Transitory factors indeed.