Why the Fed is cutting rates sooner than later
The Federal Reserve meets later this week and the market broadly expects a 25bps cut, though some hope for a 50bps cut.
A curious development in the eyes of many given the frankly stellar economic data pouring in on the US front, with every metric showing an improvement over the previous month and all but one metric beating consesus:
This had some asking whether or not the Fed will cut rates at the FOMC meeting this week and I argue the answer to that question is "yes" and it has nothing to do with the macroeconomic data whatsoever.
The Fed is going to cut because they've lost control of the interest rate, and the only way to regain control of the value of money is for them to cede control of the quantity of money altogether. We know this because the effective Federal Funds Rate (EFFR) climbed over the Interest on Excess Reserves (IOER) in March and has stayed there despite two "technical adjustments" to the IEOR during the last two Fed meetings. IOER is supposed to be the "ceiling" above which the EFFR will not go--in the current environment then, banks are voluntarily choosing to take a lower interest rate by leaving funds parked at the Fed rather than loaning them out:
To be sure, something "broke" in September of 2018 when the EFFR climbed to match IOER exactly--again something that isn't supposed to happen. The Fed tried to compensate for this by adjusting the IOER downward (derp?) but to no avail. We went from simply "broken" to "catastrophe looms" on March 20th when the EFFR spiked over IOER and there it has stayed.
So why are central banks hoarding liquidity--after all that is exactly what this chart tells us. Banks are voluntarily choosing to get a lower return on interest via the IOER than by simply lending that money out--what are they so worried about? And will the Fed tolerate losing control over the interest rate--the one thing the Fed is supposedly competent in managing?
My money is on a 25bps cut this week--of course that will be too little, too late. But if they don't cut now, they will need to provide a much larger cut come September.
Then again, one should never underestimate the absolute incompetence of central bankers.
A curious development in the eyes of many given the frankly stellar economic data pouring in on the US front, with every metric showing an improvement over the previous month and all but one metric beating consesus:
The Fed is going to cut because they've lost control of the interest rate, and the only way to regain control of the value of money is for them to cede control of the quantity of money altogether. We know this because the effective Federal Funds Rate (EFFR) climbed over the Interest on Excess Reserves (IOER) in March and has stayed there despite two "technical adjustments" to the IEOR during the last two Fed meetings. IOER is supposed to be the "ceiling" above which the EFFR will not go--in the current environment then, banks are voluntarily choosing to take a lower interest rate by leaving funds parked at the Fed rather than loaning them out:
To be sure, something "broke" in September of 2018 when the EFFR climbed to match IOER exactly--again something that isn't supposed to happen. The Fed tried to compensate for this by adjusting the IOER downward (derp?) but to no avail. We went from simply "broken" to "catastrophe looms" on March 20th when the EFFR spiked over IOER and there it has stayed.
So why are central banks hoarding liquidity--after all that is exactly what this chart tells us. Banks are voluntarily choosing to get a lower return on interest via the IOER than by simply lending that money out--what are they so worried about? And will the Fed tolerate losing control over the interest rate--the one thing the Fed is supposedly competent in managing?
My money is on a 25bps cut this week--of course that will be too little, too late. But if they don't cut now, they will need to provide a much larger cut come September.
Then again, one should never underestimate the absolute incompetence of central bankers.
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