Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Is This Interest Rate Hike Rigged?

Interest-Rates / US Interest Rates Dec 22, 2015 - 06:15 PM GMT

By: Anthony_Cherniawski

Interest-Rates It’s official.

This week the Federal Reserve raised the key overnight Fed Funds rate by 0.25%. The move was discussed, debated, argued, and telegraphed to death. We all heard about it until we hoped anything else financial would happen so we could finally put the tired story to rest.

Now that the rate hike is on the books, we can start talking about outcomes, like how in the world the Fed intends to enforce the rate hike, what it means, and what comes next.


The first one is not so simple, the second is annoying, and the third is downright depressing. But we’d better start planning for this today, because it will definitely affect our investments in the months to come!

This rate hike is unlike any other. It comes on the heels of several quantitative easing programs that have dumped trillions of new dollars into the banking system.

Before the financial crisis, banks held about $60 billion of excess reserves at the Fed. These are funds above and beyond their required reserves.

Today, excess reserves total about $2.6 trillion, which represents part of the money the Fed printed and then used to buy bonds. Typically this cash would have flowed into the economy through lending, but in 2008 the Fed started paying interest on excess reserves, which has kept the funds out of circulation.

With so much extra cash in their accounts, banks have almost no need to borrow from each other.

This creates a problem for the Fed because adjusting the rate at which banks lend to each other, called the Fed Funds rate, is how it historically enforced its interest rate policy. Starting this week, the Fed will have to use new, largely untested tools.

Since there is almost zero demand for money between banks, the Fed is increasing the interest it pays on excess reserves from 0.25% to 0.50%.

At the same time, the Fed intends to lend out up to $2 trillion of its own stash of bonds in the overnight repurchase market. It will lend these to banks, money market funds, and other institutions for one night, with an agreement to buy the bonds back the next day at a slightly higher price, effectively paying the counterparty 0.25% interest.

It’s more than a little backwards.

The upshot is that instead of banks paying each other the higher rate of interest after a rate hike, now it’s the Fed, which means it’s really me and you, since the Fed gets money by taking value from the rest of us. At the new, higher rate, this is about $10.5 billion per year that is nothing but a gift to banks.

And don’t expect your deposit rate to move higher anytime soon.

Banks pay interest to depositors to attract and retain cash. Right now, they don’t need your money.

As for what lies ahead, expect uncertainty, which is a word the markets hate.

In her press conference after the Fed meeting, Chair Yellen went to great lengths to explain that subsequent rate changes would not be mechanical, incremental hikes at regular intervals.

Instead, she described the rate of increase as gradual, with each decision depending on market factors affecting inflation and employment.

Sound familiar?

The most powerful financial regulatory body on the planet once again told the world, that while they think rates will be higher over the next couple of years, they will examine every piece of evidence as it comes along.

In doing so, they reserve the right to raise rates, keep them the same, or even lower them if necessary. All of which leaves investors hanging on every data point as we approach each Fed meeting over the next couple of years, agonizing over whether or not there is enough strength for higher rates.

We don’t think there will be.

Even though the Fed’s consensus estimate is for overnight rates to reach near 1.50% by the end of 2016, we see the U.S. economy rolling over next year, which should make the Fed more accommodative, not less.

Whatever they choose to do, let’s hope that Janet & Company buy a really big bullhorn and use it to make their intentions known. Otherwise, we’re all going to be stuck spending a lot of time, and spilling a lot of ink, on the same old subject for the next several years.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2015 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules