Nobody But The Fed! Expiration Of Fed Bank Bailout Facility Strengthens Calls For Earlier Rate-Cut (As Core Inflation Falls Below Fed Funds Target Rate)

Confounded Interest ^ | 01/10/2024 | Anthony B. Sanders

[Kaiser8408a]

Nobody manipulates markets like The Federal Reserve! Nobody but The Fed.

Here we sit with core inflation rate BELOW the current Fed Funds Target Rate (upper bound). So is it time to start withdrawing its more than ample monetary stimulus. Like the Bank Term Funding Program.

The Federal Reserve is likely to retire the Bank Term Funding Program in March. This would entail an additional ongoing headwind for reserves, and thus liquidity, through 2024. At the margin, this adds weight to the case for the Fed cutting interest rates sooner in the year.

The BTFP was created in the wake of the SVB crisis to help struggling banks get access to liquidity when bond prices were dropping. However, its use in recent months has jumped to over $140 billion. That is not, however, a sign of banking stress.

The chart below shows the usage of the BTFP along with the rate paid at the 99th percentile in the fed funds market relative to the upper bound of the range for fed funds.

As can be seen, this is under zero, i.e. banks are not having to pay up to get liquidity.

This is in stark contrast to last March at the time of SVB’s fall when some banks were having to pay 15 bps above the fed funds upper bound for liquidity.

This time the rise in BTFP usage is good old-fashioned arbitrage. After the Fed’s pivot, term rates have come down relative to the policy rate. The cost to use the BTFP is 1y OIS + 10 bps, which is ~4.90%. Banks can post USTs at par as collateral, borrow at this rate, then deposit the funds back at the Fed at the IORB rate (interest on reserve balances), i.e. 5.40%, for a juicy risk-free profit.

[AndyJackson]

Core Inflation

How about instead of working off of BLS manipulated numbers we worry about the inflation that the median employed taxpaying US citizen experiences in daily life inlcuing "volatile" things like food, energy, clothing and shelter AND inScreased non-optional taxes and fees - the things we all pay to get along with our lives.

[Daveinyork]

With a 34 trillion dollar debt,and continuing deficits, some combination of recession and inflation is inevitable.

[SaxxonWoods]

The FED knows better than to cut anytime soon, fortunately.

[Mariner]

“The FED knows better than to cut anytime soon, fortunately.”

That doesn’t mean they won’t do it anyway.

You know, do their part to save civilization from DJT.

[SaxxonWoods]

“That doesn’t mean they won’t do it anyway.
You know, do their part to save civilization from DJT.”

Their biggest worry is their own status and reputation. They are scared of inflation coming back like it did near the end of Carter’s folly and they will look like fools if that happens.