Fed Loses Control Of Its Own Interest Rate As It Cut Rates — ‘this Just Doesn’t Look Good’

https://www.cnbc.com/2019/09/18/fed...-big-decision-this-just-doesnt-look-good.html

Fed loses control of its own interest rate as it cut rates — ‘This just doesn’t look good’
Published Wed, Sep 18 2019 11:17 AM EDTUpdated 3 hours ago
Patti Domm@pattidomm





Key Points

• It’s been a turbulent week in the overnight funding markets, where short-term rates spiked to levels as high as 10% Monday and Tuesday before the Fed calmed it down.
• The Fed was forced to do two open market operations to tame the rate move, but its own fed funds target rate, in an unusual move, rose to 2.3% — above the fed funds target rate range it set on July 31.
• Market pros said the problem came from a cash crunch, not a credit crisis, but the Fed will have to find a permanent fix for it before it impacts the financial system.
• Fed Chairman Jerome Powell said he expects the market to steady and said the Fed is ready to intervene as needed.

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As the Fed was meeting to consider cutting interest rates, it lost control of the very benchmark rate that it manages.

It’s been a rough week in the overnight funding market, where interest rates temporarily spiked to as high as 10% for some transactions Monday and Tuesday. The market is considered the basic plumbing for financial markets, where banks who have a short-term need for cash come to fund themselves.

The odd spike in rates forced the Fed to jump in with money market operations aimed at reining them in, and after the second operation Wednesday morning, it seemed to have calmed the market. The Fed announced a third operation for Thursday morning.

In a rare move, the Fed’s own benchmark fed funds target rate rose to 2.3% on Tuesday, above the target range set when it cut rates at its last meeting in July. The target range was since cut by a quarter point Wednesday to 1.75% to 2% from 2 to 2.25%.

“This just doesn’t look good. You set your target. You’re the all-powerful Fed. You’re supposed to control it and you can’t on Fed day. It looks bad. This has been a tough run for Powell,” said Michael Schumacher, director, rate strategy, at Wells Fargo.

Fed Chairman Jerome Powell, in addressing the run up in short-term funding rates, said the Fed had been expecting extra demand because of Treasury settlements and a need for cash by corporations who were paying taxes. But he said it was surprised by the volatile market.

“For the foreseeable future, we’re going to be looking at it, if needed, doing the sorts of things we did the last two days, these temporary open market operations That’ll be the tool we use,” the chairman told reporters after the Fed announced a quarter point rate cut Wednesday afternoon.

Schumacher and other strategists said the Fed’s two operations Tuesday and Wednesday morning seem to have calmed the market for now, but the question is why did the wild swing in rates happen in the first place. Strategists say it seems to be the result of a cash crunch, not, for now, the makings of a credit crisis.

Powell said the Fed would be looking at the situation and over the next six weeks the Fed will take stock of what’s happening in the market before deciding what steps to take to deal with volatility spikes.

Drew Matus, chief market strategist at MetLife Investment Management said funding markets could be volatile for the next couple of weeks.

“I can’t pinpoint what happened. And I’m not sure anyone can. I’m not sure the Fed knows because he said he’s going to learn over the next six weeks. I’m taking away from that that the funding markets are going to be more volatile over the next six weeks.” Matus said. “They don’t have a solution because in part, they’re still learning. The market is very different than it was before the crisis. When we began the restart of normalizing policy, this is one of the things that was going to be a learning experience.”

A second rate the Fed watches, the secured overnight financing rate, or SOFR, shot up to 5.25% on Tuesday from 2.43%. That is the median rate for $1.2 trillion in short-term funding transactions that occurred Tuesday. SOFR affects floating rates on about $285 billion outstanding in corporate and other loans.


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What is a repo?
But the concern is if it persists, it could give the appearance of an underlying problem in the financial system. Strategists pin the problem on a number of factors, including the Fed’s reduction in its own balance sheet, which removed some liquidity from the market, as well as changes in rules after the financial crisis, which required banks to hold more capital, reducing their ability to offer repos, or repurchase agreements. A repo is an exchange of collateral, such as Treasury securities, for cash.

On Monday, there seems to have been a perfect storm in the market, causing a cash shortage. Corporations were seeking dollars for quarterly tax payments, and the Treasury had also issued a large amount of bills, which reduces liquidity. There was also speculation that the attack on Saudi Aramco, which took half its production off line, may have spurred demand as oil spiked and investors feared a Middle East conflict.

The Fed on Tuesday accepted $75 billion of $80.5 billion in bids submitted in its overnight repo operation, after accepting $53 billion on Monday. The repo rate was quoted at 2.25% to 2.60% after Tuesday’s operation from a range that was up to above it at 3%, just before it. That rate on Tuesday temporarily hit a high of 9%.

“They’re working on this repo problem. It’s a work in progress. They’re doing very well. They pretty much got it under control,” said Ralph Axel, rates strategist at Bank of America Merrill Lynch.

The Fed also trimmed the interest rate on excess reserves at its meeting Wednesday, in an effort to better control its fed funds rate. It trimmed it to 1.8%, a 30 basis point cut compared with the 25 basis point reduction for the benchmark funds rate, now at 1.75 to 2%.

“Generally this whole repo spike is declining, too. So you would expect fed funds to probably print a little bit lower tomorrow, but it may not be enough to be within the band,” said Axel.

Matus said the short-term funding squeeze was probably the result of a number of events, including tax payment day, but he and others noted that it does not normally happen on tax day. “The repo market that we’re thinking of, the pre-crisis repo market of 2008 doesn’t exist any more. It’s a different market with different rules for banks and primary dealers,” he said.

Matus added that the staffing at the New York Fed is different. There is currently no permanent head of its markets group since Simon Potter left in June. Potter had served in that role since 2012. The markets group oversees implementation of domestic open market and foreign exchange trading operations for the Federal Open Market Committee.

Fed must address Wednesday
Axel said the market will be looking for answers from the Fed on how it will solve the problem permanently, particularly with the approach of the end of the quarter on Sept. 30, when there is more funding pressure as alternate financing is typically reduced at quarter end and repo is in high demand. There have been other incidents where rates in the repo market shot up including in December when markets were selling off.

“Does the Fed continue to roll over the $75 billion facility for the rest of the month? Or does it shift over to permanent operations?” said Axel. “Sept. 30 is another potential hot spot for funding rates. It’s a big issue to make sure they control rates on Sept. 30 to make sure they stay within their band.”

Axel said he believes the quick crunch came just as the Treasury Department moved to shore up its own cash reserves, which grew from $183 billion a week ago Wednesday to $298 billion by Monday.

“Since the 2011 debt ceiling crisis, Treasury has decided to maintain a very large cash balance,” said Axel, adding the Treasury previously did not find it necessary. He said the Treasury decided that it is in the public interest to have a large cash balance should it ever need to absorb any problems in the Treasury funding market.

Axel said the funds are drawn from excess reserves which the Fed controls, and that lowers the money supply. “That’s why to offset this, and to solve the problems that were in the financing markets, the Fed added money to the money supply through open market operations which is the traditional role of the New York Fed,” he said.


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QE has begun again folks.

 

From what I understand... and none of these articles will talk about it. the rates went so high that credit between the banks stopped. Once that happens credit to everyone else stops as well. The major banks are in trouble folks and no one wants to talk about it.

 

You seem to be tapping into a news source that I am not familiar with . Where is your information coming from ?

 

I just located your news source CNBC . That explains why I was not privy of this information . I put their credibility lower than a snake's belly and do not keep up with their ranting . They are about always later to be found lying in an attempt to boost the credibility of the democrat / communist party . Sadly this is the same garbage being feed to other countries outside the U.S. . I can understand the anger at the U.S. from some of our members who reside outside the U.S.. They are like mushrooms "kept in the dark and feed sh-- " . If anyone believes this CNBC breaking news , just call their bank and ask to speak to the loan officer " ask them if this is true " ? I wouldn't give my real name though because the answer may be embarrassing .

 

The Feds had to inject $75 billion starting Monday for Repos in order for banks to meet required cash reserves. This has certainly been discussed in the financial markets. The fact that the feds has to do this is a huge alarm that is hard for anyone who is looking to miss.

https://news.yahoo.com/why-ny-fed-pumping-billions-money-market-220629543.html

 

Actually.........that CNBC would even mention this, points to how serious this is. This has been top story on "ALL" financial news sources. This is a huge "ALERT" warning that everyone should be giving serious attention. This is about as clear of a warning as you will get of possible financial anarchy. It may not happen, but this is a big deal. This clearly shows that there is fear, and loathing in the financial markets. If this completely blows up.......this will make 2008 melt-down look like fun and party.

 

I am way back in an isolated spot , but nearly daily I receive messages of someone wanting to loan me money , usually by phone , computer or snail mail . I haven't seen any reduction in my deluge of loan offers . Have you guys seen any reduction in loan offers ?

 

The point being made here is that central planning of an economy does not work. It has never worked long term. Especially with an economy as large and diverse as the American economy. The free market is much better at anticipating need than central planning ever can be. Every major economic downturn we have ever had has been directly or indirectly caused by central planning and the do called "federal" "reserve" has caused the worst of the problems including the great depression.

 

There is a reason for that, there is a massive amount of money looking for a place to park. With negative interest just starting, anything fairly solid, they are looking to park there. Money is desperately looking for anything that does not eat, and negative interest EATS.

 

If there is anyone on this forum who does not fully grasp the "World Wide" financial meltdown of 2008, especially its cause, its ramifications, and that the temporary fix, not only did not fix anything, it has made the issue massively larger. There are a few good movies about that event.

 

Here is one from Breitbart if you want an alternative news source. Think about it, if you needed to borrow money just to survive for the night, wouldn't that be a sign of a significant lack of adequate cash on the individual level?

https://www.breitbart.com/economy/2019/09/19/fed-pumps-75-billion-into-financial-system-again/

 

To be honest I don't understand the ramification of a financial meltdown . I do not recall any thing bad happening in 2008 but then again I live sort of isolated . However I know the world doesn't revolve around me so perhaps it will have a negative effect on other people or perhaps government systems . I would be interested in knowing what some might think would be the result of a financial meltdown . I might have to make a effort to try to view one of those movies about a financial meltdown , perhaps I can find one on you tube .

 

As long as you don't purchase "ANYTHING" and I do mean purchase "ANYTHING", you will be fine.

Here is some info. https://www.bing.com/videos/search?q=2008+financial+meltdown&FORM=AWVR

 

You were lucky back in 2008. At that time I had two boys starting college (1 in 2008 and 1 in 2009). The crash literally wiped out half of my educational savings. I am in a much better position today with being debt free since 2016. I will never have debt again, or be beholden to any organization that a crash would compromise my financial standing. A crash today would have little impact on me.

I have two sons now earlier in there career. Both are fortunate to have no debt, but a crash would certainly impact their careers, and both work for organizations that need access to capital and interact with other companies that need access to capital. If they had expensive mortgages, or were saddled with huge debts I’d be very worried for them.

 

I don't care for cnbc either but for some reason they actually discussed it. I heard about this elsewhere from someone who follows these things very closely and I had to go hunting to find any mainstream publication of any of this. They are keeping very quiet about the truth of this and the ramifications. I am sorry for not posting the link with the article. It was an oversight and I always try to insure the link is posted anytime that I C&P a story. I am sorry I didn't. Now you can discount this if you want to because of that one source which I probably would do as well but I would advise you not to in this case.

 

Thank you!

 

A true financial meltdown would shut down everything. There would be no commerce. No trucking, no food, farmers could not sell, now days everything runs on credit, even governments and corporations. Everything would stop. Until a new system that people trusted was put in place, likely everything would totally STOP. I can see that it might be worse then a CME or EMP total grid down for longtime.

 

...or replaced by a new system that the people don't trust. Governments would love to see a cashless society put into action, where they can have total and absolute control over the people.

A cashless society is coming, whether we like it or not. Unfortunately, it's not a matter of IF, but WHEN. A total re-set event such as a large scale meltdown may become the perfect catalyst for it.


.

 

Try to remember how many businesses closed in 2008. How many people were out of work and how many people lost their homes. Also , how many banks closed and were gobbled up by the few gigantic banks we have now. Remember "too big to fail". Now they are even bigger. Nothing was fixed... just propped up to keep running.

 

I think that sadly you are right and that will insure complete control over everyone. Just think what happens when they deem you an enemy of the state and turn off your access to the electronic money. Wouldn't it be something that they also might want to blame on Donald Trump right before the election? A double bonus for the globalists. So, how does one fight electronic money> Don't use it and use silver, gold and barter? Black Market?

 

I suspect that PMs will be worthless in such a scenario.

To be sure, when Cashless is King, the governments will hold the system so tightly that we would either succumb or suffocate in its grip. Black markets/bartering would pose a huge threat to a cashless system, so you can imagine that the consequences of going against the system would be quite severe.

It would be a "do as we say, or else... no job for you... no medical care for you... no home... no buying anything... no life" kind of thing.

I would also imagine there would be a lot of snitching going on, too... Someone gets PO'd at you for something, they report you for real or fictitious things and you get Red Flagged. You know the governments would encourage it.
.


.

 

Over-reliance on central banks

https://www.zerohedge.com/markets/t...l-warns-dangerous-over-reliance-central-banks

 

QE article

https://www.zerohedge.com/markets/fed-will-restart-qe-november-how-it-will-do-it

The American black market represents at least 40% of the entire market.

By PM, you mean precious metals, right? Federal laws only mean anything unless they can enforce them. Mainly, making something illegal makes the contraband's price go up. Heroin is illegal in the USA, therefore people are afraid to own it, right?! No heroin here, right?!

Ban the use of gold and silver and their value will skyrocket. My dad and his brothers were on the wrong side of the law and carried on their businesses with impunity. Their crew paid off the cops and the state congressmen. The Feds rarely came 'round. Anyone who went stool pigeon went missing.

The black market is enforced by "legal" cops and by "good'ol'boys" and up North, "goodfellas". Federal congress men and women could not run their political campaigns without "under the table" funding and perks.

The real streets are not nice and after the SHTF, they'll be FAR less nice. The Fed is losing control even now -- just wait until government goes bankrupt. America is going to have itself a military takeover. Don't get in the way of the military and you'll be fine. Firefighters were working a house fire in my neighborhood (this was in a state where I lived a decade ago). I brought them a case of bottled water -- it was summer and they were dying in the heat. Find the soldiers and cops that can be turned. Find out what they and their families need. Help them out. Do stuff for their children -- use illegal silver to buy their kids gifts and food and clothes. They'll even help you out with the illegal stuff you are doing.

Mainly it was one of my dad's brothers who "did stuff" for the cops, him and his buddies would even ride with the cops at night to "take care of business". When there were going to be raids, the families (mine included) were given a heads-up and certain guys would "take the fall" this time. Somebody else would take the fall for the next raid. Raids had to be done to keep the idiot goody-two-shoe people happy -- especially the plastic Christians. The local government had to make them happy every so often so that they would pay their taxes. You gotta graze the sheeple.

 

Good morning Last Outlaw and all,

Much good info above but remember, it is short term info.

Unless someone's obliged to keep up with the financial news in some detail, it's not that important for front-burner worries. The major aspect of financial markets for most is to watch - and if need be, to worry - is the yield on the 10 year US Treasury note. In sophisticated economies even bilateral trade deficits don't mean anything to the private citizen.

A tangent; The "Fed", the Federal Reserve System, besides monetary policy and procedures, now also does some Treasury Department fiscal operations.

"I'm shocked, shocked ... " Police Inspector Renault (Claude Raines, movie "Casa Blanca") ...... Love the expressions: "and up north, ' goodfellers'" , "plastic Christians" ! Thank you, Old Geezer.

cc: Mike Rockefeller, former Aussie section of New Guinea
Winthrop Rockefeller, Arkansas
Jay Rockefeller, West Virginia

 

'We on this forum are a hell of a lot smarter then you grasp. We see past simulated fake intellectual masturbation.

 

I had to go watch a film to educate myself on this matter . One statement on the film that someone made to describe the event a "job holocaust " . I stated recently on another thread of various countries going into a economic collapse some farther along than others with Venezuela and China being in the group of spiraling economies . At this point the U.S. has the strongest job market in history , reportedly more jobs available than we have workers . Salaries for the workers increasing . We are having to build a wall to keep citizens from failed economic countries from illegally trying to gain entry into the booming economically U.S. . Now with that being said I will acknowledge the possibility of the U.S. spiraling down the drain with the other collapsing countries but at this point in time find that unlikely . I find this more likely contrived by Democrats / communist that are hoping this will happen . Their hate for Donald Trump is stronger than their love of their country . Their thinking has gone from rational to insane . Yes this U.S. economic collapse could happen especially if the deranged Democrats / Communist ever regains control of the white house . This should be a wake up bell for some . They will likely have at least five more years before the communist gain control of the U.S. White House . Five more years to prepare and get out of debt .

 

More data on current lead-up to U.S. dollar collapse:

https://www.zerohedge.com/markets/fiat-money-cannibalization-america

Euro also

https://www.zerohedge.com/geopolitical/europe-cracks-are-beginning-show

 

"Why the Fed may be forced to hit the brakes on US dollar slide"

https://www.scmp.com/economy/china-...slide-erode-its-status-worlds-currency-choice