The FED Giveth and the FED Taketh Away On Wednesday, November 2nd, the FED held its "Federal Open Market Committee meeting" and made the announcement the market has been breathlessly awaiting. As expected, Chairman Jerome Powell announced a hike of 75 basis points in the fed funds rate. Along with the announcement, the market was hoping for some indication of a "pivot", i.e., that the FED would give some indication that it was going to be slackening off on its rapid rate increases. And in this respect, the November FED Announcement did throw the market a bone. It added the new phrase “Cumulative Tightening” to the standard announcement. So, going forward, the FED will take the fact … [Read more...]
Surprise, Surprise, The FED Raises Rates by .75%
At its June 15th meeting, the FED announced that it will be raising rates by ¾%. Up until last week, this would have been a big shock to the market. But despite the imposed FED silent period leading up to their Wednesday meeting "somehow" journalists from all the major financial publications published remarkably similar articles predicting a 0.75% increase in the FED funds rate. Prior to this leaked guidance, the consensus was that the FED would increase rates by ½% but last week's higher-than-expected inflation report threw a wrench into the works. Everyone is making a big deal out of the fact that this is the first raise of that magnitude since 1994. And that it will double the FED … [Read more...]
FED Issues September 2021 Statement
On September 22, 2021, the Federal Reserve reported its current policy position. Currently, the FED is creating liquidity (i.e., printing money) through its Quantitative Easing (QE) program at the rate of $120 billion per month. The market has been fearing that the FED would begin tapering, i.e., cutting back on its liquidity creation. Rumor was that the FED would start reducing their QE by $10-$15 billion per month due to inflation concerns. The last time the FED embarked on a tapering plan back in 2017, they used a two-prong approach of raising the FED Funds rate and reducing the monthly printing by $10 Billion every three months (i.e., roughly $3.3 billion per month). The result of … [Read more...]
What is the Federal Funds Rate?
By law banks are required to maintain a certain percentage of their assets in reserves at any given time. This money is held at the Federal Reserve bank and is called the “Reserve Requirement”. Generally, this money does not earn any interest. But, any money over and above this minimum can be loaned to other banks to who might not have enough reserves. The rate that banks can charge each other is called the “Federal Funds rate” or “Fed Funds Rate”. The monetary policy-making body of the Federal Reserve System, is called the “Federal Open Market Committee” or “FOMC”. The FOMC meets eight times a year to discuss the economy and decide on any changes to monetary policy. One of the major … [Read more...]
US Consumer Spending vs. FED Inflation Decision
The Fed will meet on the 16th and 17th of September to decide whether it’s time to normalize its accommodative monetary policy. But despite vice-chairman Stanley Fischer’s hints at an inflation increase in September, analysts still think that several factors complicate the FED’s decision. Recent turbulence in equities markets across the globe as well as uncertainties about China’s market are only some of the factors putting a damper on the economy. During an Economic Policy Symposium held in Wyoming this August, central bankers discussed how inflation would finally rise despite these issues. After all, the factors that had been holding it down (including fading oil prices, downward … [Read more...]
Taper Caper: Has the FED Been “Politicized” or “Captured”?
By Ben Hunt, Ph.D. Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural. The procedural event was the intentional injection of ambiguity into Fed communications. As I’ll describe below, this is an even greater policy mistake than the initial June FOMC meeting when “tapering” first entered our collective vocabulary. The structural event ... which is far more important, far more long-lasting, and just plain sad ... is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government … [Read more...]
The Mystery of the Missing Taper
Taper Caper: Conspiracy Theory Last Thursday, prior to the FOMC announcement, I was invited to come sit with another group of friends and traders everyone was sure there would be some type of tapering. That message had been clearly communicated to the markets. When the announcement came, the telephones went off and everyone erupted with various forms of surprise. I fully admit to being speechless. I kept waiting for some kind of explanation, and none came. The more we talked about it and the more I thought about it later, the more convinced I became that this was one of the more ham-handed policy announcements from the Fed in a very long time. Why would you go to the trouble of getting the … [Read more...]