EC Right On Cue, Low Money Rates Are Not What You Might Think

For several weeks now, the Federal Reserve has launched one bazooka after another. Officials there keep reassuring the markets, and the public, they’ve got an unlimited toolkit. However, the fact that they feel it necessary to keep showing you is a warning sign, especially how quickly each one is forgotten and overshadowed by the latest Big New Thing.

The reason why is simple: they are all the same thing just with different letters and bigger numbers. Central bankers can explore infinity along an X-axis not realizing they live in at least two dimensions with also a Y-axis to consider.

When the level of bank reserves starts to rise and accelerate, that’s supposed to be a good thing. It’s not. All that balance tells you is what the Fed is doing, not how successful it might be at its one-dimensional masturbation.

And when it comes to judging such success, the public is already at a huge disadvantage. As I wrote two weeks ago, the appearance of low rates, including low money rates, can be misleading. It is easy to connect the one with the other; the Fed expanding its balance sheet, creating hundreds of billions if not trillions more in bank reserves, and at the same time observing a decline in short-term rates.

This is, in fact, what we can see right now. Repo rates are falling, as is the effective federal funds rate. The GC repo rate for UST collateral was down to just 7.4 bps (DTCC) Friday, the lowest spread to RRP since September 2017 right at the first eruption of what would become Euro$ #4.

Congratulations, Jay Powell?

Oh no. Quite the opposite. The ongoing strain even intensifying of inelasticity now seems to have taken on the worst elements of a crisis including counterparty risk. Here’s part of what I wrote on March 10, pertaining to the repo rate:

Imagine you are a cash-rich bank while chaos rages all around you. Risk averse, absolutely, therefore you want the highest, best possible security for your cash. The best quality collateral, that is.

What if no one has any?

In other words, you’ve got spare cash and don’t mind carefully parceling it out but you can’t find any takers. Not for lack of willingness, mind you; it’s a crisis, after all, and the line is out the door. Counterparties would love to borrow every last nickel you’d offer, but they can’t because you’ll only accept the highest quality collateral in return which they don’t have and can’t get.

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Moon Kil Woong 1 week ago Contributor's comment

Very true, banks are not interested in lending unless you are willing to pay credit card rates. This has been true for quite some time and is why banks sell your home loan as fast as they can to Fannie Mae, Freddie Mac, or anyone who will take it as fast as they can. The risk is not adequate to the rate and is why lowering rates that are already low don't help much in creating more monetary expansion.

Actually, if the Federal reserve found a way to force down credit card rates it may encourage more spending on the lower end of the income bracket because its clear that the upper end of the income bracket isn't affected much at all to borrow anymore.

Terrence Howard 1 week ago Member's comment

That's a good point I hadn't though of.