Notes From Underground: Two Previous Pieces That Maintain Their Relevance

After more testimony from Chair Yellen and more verbal acrobatics from ECB President Draghi, I am posting a CNBC hit with Rick Santelli and an early January 2014 piece noting that the FED practice of economics is not “rocket science.” In listening to Yellen and reading Jeremy Stein’s recent speech, Fed policy is still based on the best “educated guesses” of some very bright theoreticians. Sometimes it is good to take a look backwards .While many have been surprised by the volatility in the yield curves it did not surprise readers of Notes From Underground.The 5/30s curve represents the search for value and a traders market where some large positions had to be unwound. The next few months on the yield curves will be very important for many asset classes, but we will analyze that next week.


January 8, 2014: Looking at Yield Curve Volatility (CNBC)

January 5, 2014: It Ain’t Rocket Science, Which Is Too Bad for the Dismal Science

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4 Responses to “Notes From Underground: Two Previous Pieces That Maintain Their Relevance”

  1. Says:

    An article in WSJ shows that the big banks are positioned for end of the year 10 year yields of 3.25 – 3.75%. Are you saying we are seeing an unwinding of that position that is exaggerating the drop in 10 year yields? If so, do you think, as so many others seem to, that the harsh winter and Ukraine intrigue were the initial catalysts? I recall that even before the harsh winter there was a debate about whether “the taper” would lead to a rise or fall in long bonds as pundits suggested that the loss of treasury/agency purchases would slow growth prospects and paradoxically lower yields. So where do you come down? Temporary factors (winter/Ukraine) with a second half rebound, or longer term growth concerns? Or maybe neither?

  2. andy Says:

    Friday, May 9, 2014
    Federal Reserve to begin test running new Term Deposit Facility (TDF)
    Just this morning, the Federal Reserve Board of Governors announced that they will begin test running the new Term Deposit Facility, which was created in a final rule back in June of 2010 (link). This rule amended the Fed’s Regulation D to allow for the auction of these new term deposits. I’m not entirely sure if this was the Fed’s own initiative, or if it was a new authority granted the Financial Services Regulatory Relief Act of 2006, or some GFC related statute.

    So now, in addition to paying interest on excess reserves through the new Excess Balance Accounts, the Fed has another tool at its disposal to maintain a non-zero interest rate, without selling Treasury securities in open market operations. In other words, its now possible for the Fed to do QE-Infinity, buy up all the Treasury Securities on the market, and still maintain an overnight interest rate above zero. This new term deposit facility is basically just the Fed selling its own short term Certificates of Deposit (CDs), in order to provide an interest bearing alternatives to plain reserve balances. To be clear, these new term deposits do not satisfy an institution’s required reserve balance or clearing balance and do not constitute excess balances. They are not available to clear payments and cant be used to reduce daylight or overnight overdrafts.

    According to the Fed,
    Term deposits may be awarded through a competitive single-price auction format with a non-competitive bidding option, a fixed-rate format at the interest rate specified in advance, or a floating-rate format. The interest rate paid on term deposits awarded through a floating-rate format will be the operation effective interest rate, which is determined by the average of the daily effective rates over the term of the instrument.

    However, just as with the interest-bearing Excess Balance accounts, Fannie, Freddie, and the Federal Home Loan Banks are not eligible for this program. This means that they will continue to trade in the Federal Funds Market, which is why the effective Federal Funds Rate remains below the 25 basis points payed on excess reserve balances.As an aside, in the text of the final rule establishing the Excess Balance accounts, the Fed refers to un-remunerated reserve requirements as a “tax”, just as Warren Mosler has.

    I see this new facility as a modernization of monetary policy, which should make all the operations simpler to execute, and more importantly, easier for the general public to understand. Most people understand how CDs work, and these TDF are similar. For that reason, hopefully this test run will be successful, and will help us MMTers make our points, especially since Professor Scott Fullwiler has written extensively on these new advancements.

    However, since this is just a test run, they are only planning on selling about $10 billion of these TDF. More information is available here.

  3. Alex F Says:

    If the Fed maintains a $4trn balance sheet for several years, then the terminal fed funds rate would be 6% instead of 3%.

    The FOMC will need to raise the fed funds rate significantly more in order to offset the easing impact of having a large balance sheet.

  4. yra Says:

    To all—very good posts and I will provide feedback when I return to Chicago later today.Thanks for all the input

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