Me too. Now all we need to agree on is what factors the markets use to set rates:
1. Borrowers demand for money
2. Lenders supply of funds to loan
Also lenders willingness to take risks (short term holding cash at zero versus risk of default), lenders perception of future rates, borrowers perceptions, which leads to lenders and borrowers perceptions of being able to refinance at more favorable rates.
The spike up in spread in groanup's link came from a sudden unwillingess to loan at low rates. At the same time treasuries dropped in anticipation of future Fed rate cuts. Borrowers bid 3 month yields lower being fairly sure that they would refinance at yet lower rates in the future. The reserve banks were able to set lower rates since they could use those loans as collateral for even lower rate short term loans from the Fed. The low rates ripple out from there although unevenly with fluctuations.
Excellent!
Now all we need to agree on is what factors the markets use to set rates:
Okay.
1. Borrowers demand for money
Yes.
2. Lenders supply of funds to loan
Yes.
Also lenders willingness to take risks (short term holding cash at zero versus risk of default), lenders perception of future rates, borrowers perceptions, which leads to lenders and borrowers perceptions of being able to refinance at more favorable rates.
You bet.
The spike up in spread in groanup's link came from a sudden unwillingess to loan at low rates.
Or to loan at all.
At the same time treasuries dropped in anticipation of future Fed rate cuts.
I think you meant Treasuries rose.
Borrowers bid 3 month yields lower being fairly sure that they would refinance at yet lower rates in the future.
You mean they stopped borrowing? Or are you talking about Treasury yields?
The low rates ripple out from there although unevenly with fluctuations.
Ripple out where? To longer term loans? Longer term Treasuries? Not sure what you're saying.
Which is established by banking reserves. As everyone here understands, the Federal Reserve does engage in open market operations to expand or contract banking reserves, which directly expands or contracts the amount of money that a bank can lawfully lend.
Yes, good point. But is it supply and demand or “eagerness” to either supply or demand that is the crucial variable?