Posts Tagged ‘IOER’

Notes From Underground: Overheated to Overrated

February 27, 2018

In his first Congressional testimony as Fed Chairman Jerome Powell didn’t surprise as he was measured and succinct in presenting a more market-based approach to monetary policy. The equity, currency, precious metals and debt markets were all in sell mode as the prepared statement gave rise to a renewed sense that the FED will lean toward FOUR rate hikes in 2018. The key paragraph was:

“In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an OVERHEATED [emphasis mine] economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative.”


Notes From Underground: The Fed Meets Market Expectations … So How Was It Unanimous?

December 16, 2015

In the Beatles Album “Let It Be” John Lennon introduces the phrase, “Doris Gets Her Oats.” It’s supposedly just typical Lennon gibberish. But in a nod to the Beatles, Janet Yellen got her oats and the Fed did not LET IT BE. The “oats” that Janet got was that the FED increased its interest on excess reserves (IOER) to 50 basis points and overnight reverse repo (O/N RRP) rate to 25 basis points in order to pull the fed funds into the corridor. The most astounding outcome was that FOMC vote was unanimous, 10-0. With the recent über-dovish comments from Fed Governors Brainard and Tarullo, how could they have voted with the Fed Chair? Some commentators remarked that the “historic” occasion of Yellen presiding over the first Fed hike in almost nine years needed a unanimous vote. Question: What did Chair Yellen have to promise the über-doves in order to garner their votes and suffer the wrath of the Shadow Fed Chairman, Larry Summers? This will be an important question going forward for it may mean that Yellen may have compromised herself to lower for longer.


Notes From Underground: Yes, Its Been a Long, Lonely Summer for Mario Draghi

September 2, 2015

It seems that the ECB has been the forgotten soldier in the war against deflation. When Mario and company packed their speedos and the latest research from the BIS and Tomas Piketty, the world became distracted by chaos and crisis other than Greece. Chinese devaluations and daily roller coast like movements in equity markets rendered Greece momentarily irrelevant, especially as Alexis Tsiparis captured the moment from the Greek referendum and steered a somewhat pragmatic course and thought to  placate the Greek center. Greek 3-year yields dropped 3500 basis points as investors bought short-term Greek sovereigns once the fear of GREXIT faded.


Notes From Underground: The OATS Prove a Better Sale

June 14, 2015

In late April I wrote a blog post titled, “Why Bill Gross Is Right and Wrong.” I noted that Bill Gross’s call on selling German bunds was inherently correct but the French OATS–the French 10-year note, would be the more profitable sale. The yield differential at the time was 23 basis points but with the news out of Europe on Friday, the differential widened to 38 basis points. The area of concern for me is that with Germany maintaining twin surpluses–trade and budget–the ECB QE program would enhance the demand for German assets in a world of diminishing supply. The French budget and current account deficits, as well as a trade deficit, means the underlying fundamentals of the French economy are much weaker than Germany’s.


Notes From Underground: The San Francisco Fed Says It Ain’t Rocket Science … Again

May 19, 2015

The talking heads in the financial media have a great deal to answer in regards to yesterday’s release of the San Francisco Fed’s Economic Letter by Rudebusch, Wilson and Mahedy in which the three researchers said: “We find  that a second round of seasonal adjustment implies that real GDP growth so far this year appears to have been  substantially stronger than the BEA [Bureau of Economic Analysis] initially reported.”


Notes From Underground: Yellen, Draghi and the Markets … Playing Those Mind Games Together

May 6, 2015

In the midst of a dramatic seven-day bond selloff, extending from Tokyo to Frankfurt, London, New York and all bond markets in between, Chair Yellen chose today to add verbal fire to stoke the bond rout. In the early hours GLOBAL BONDS had tried to stage a rally from the previous days of endless selling. (It seems that the ECB was in buying European peripheral bonds from Spain and Italy.) Once Yellen began her remarks the BOND onslaught began anew. The key paragraph in the Yellen interview: “We need to be attentive–and are–to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up and we could see a SHARP JUMP IN LONG-TERM RATES” (emphasis mine). Upon the utterance of those six words the markets took note and the selling of all bonds in Europe and the U.S. accelerated.


Notes From Underground: The Fed, Simon Potter and the Sorcerer’s Apprentice

April 15, 2015

Another day of market volatility caused by __________ (fill in the blank). It seems that many pundits and talking heads have a cacophony of excuses for the recent bout of market moves that seem to be random and non-correlative. Poor economic news begets DOLLAR SELLING, SPOOS RALLYING AND BONDS GOING EVERY WHICH WAY. Throw in the recent erratic behavior in OIL and PRECIOUS METALS  and all previous relationships are, for the moment, non-existent. The FED has been warning that BOND markets are subject to severe volatility because markets fail to respect the FOMC‘s views on economic growth and the need to raise rates sooner than investors appear to want to believe.


Notes From Underground: Waiting For The Fed To Raise Rates … Hold On

April 8, 2015

The Fed released the minutes from the March 17-18 FOMC meeting and we would all do well to remember to be PATIENT and not be so quick to react to the headlines. (Again, I am going on record to plead that the Fed not release any data early to journalists so they may be able to release their headlines in unison with the actual Fed release. Many journalists write headlines that are misleading and allow the HFT algorithms to exploit key word phrases that are not substantiated by the actual story.) A case in point is the CNBC headline that appeared at the moment of the Fed release: “Several Participants Judged That Economic Data And Outlook Were Likely To Warrant Beginning Normalization At The June Meeting.” Yes, this is a direct quote from the minutes but it comes with a QUALIFIER. Following that line is this: “HOWEVER [emphasis mine], others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.”


Notes From Underground: The Significance of Mark Carney’s Mansion House Statement

June 16, 2014

The FED meeting begins tomorrow and concludes Wednesday with a full-blown Janet Yellen press conference. The FOMC is expected to continue the path of TAPERING by removing another $10 BILLION of asset purchases but still continuing to add to its massive balance sheet. There is talk among the “pundits” about Chair Yellen raising the expectations of a FED move to increase interest rates sooner than the market predicts. Concern has grown because several FOMC members have raised the issue of  higher REVERSE REPO and IOER (INTEREST ON EXCESS RESERVES) RATES in an effort to drain some of the vast amounts of liquidity sloshing around in the banking system.


Notes From Underground: “Yellen Would Like to End QE” (CNBC)

November 19, 2013

Yra on CNBC


Click on image to watch me discuss Janet Yellen’s hearing on CNBC’s The Santelli Exchange.