The Fed & The T-Bill Lie: The Financial System Is Not Fixed & The Global Economy Is In Danger

Saturday, May 4, 2019
By Paul Martin

by Jeffrey Snider
Sat, 05/04/2019

When all this federal funds business started, the effective federal funds (EFF) rate was pretty well established at 16 bps above the RRP “floor.” It had been that way, consistently, all throughout Reflation #3, all throughout 2017. So consistent, that dependable spread was a very solid indication of reflation.

As of yesterday, EFF was…16 bps above RRP. It’s not at all the same, though. In between December 2017 and now, the Federal Reserve has instituted three “technical adjustments” to IOER. In other words, IOER has been reduced by 15 bps just to get EFF back to where it was when all this mess began.

This is no small thing.

Nor is yesterday’s move. IOER was reduced 5 bps while EFF dropped only 4. That means EFF would still have been above where IOER was Wednesday, and it’s now 6 bps ahead of it. There’s an inexplicable upward pull, some tightness-like gravity which has latched onto the federal funds market of all things.

Some are now trying to blame the Federal Home Loan Banks (FHLB); how quickly the tax refund/money market fund excuse meekly fades down the memory hole. These are practically all that’s left of the federal funds market so they make for an easy mark. The new thinking goes like this: FHLB’s are chasing repo rates. Since repo is higher than federal funds, the absence of what’s being used by the FHLB’s to chase repo means there’s not enough left in federal funds.

First of all, there is no law that states only the FHLB’s may offer liquidity in federal funds. They’re only there because they are prohibited from getting paid IOER. Any dealer can go into that market and provide the same thing – if it so desires. Why get paid IOER when there’s an entire range of federal funds offering fatter rates.

So, even if the FHLB’s are leaving federal funds dry, where are the other dealers who should pick up the slack?

And that still leaves us with the supposed mystery surrounding repo. If FHLB’s are in pursuit of GC rates, why are GC rates where they are? Secured interbank interest should not be so much more than unsecured, let alone persist this way.

Back in March 2018, the FOMC finally spoke up about all this. They blamed, if you remember, Donald Trump. Not directly, but in the esteemed estimation of FOMC officials reckless tax reform had meant a bigger fiscal deficit which the Treasury Department would have to fund by issuing more T-bills. A deluge, many called it.

The Rest…HERE

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