A Fed Raise Conundrum, Pt 3 How Much Pain?
Summary
Discussion of economic affect or effect of RRP (reverse repo) and IOER (interest on excess reserves).
Analysis of an apparent systemic shortage in short term HQLA (high quality liquid assets).
Analysis of potential effects on the interest rate curve of 10 year UST supply and increased scarcity premiums in short-term on the run collateral.
Analysis of Fed Balance Sheet Asset Liability Maturity Mismatches and What might QE4 look like?
In Part 2 we concluded:
FFR (fed funds rate) is a tool for anchoring public and market expectations, not necessarily realizing mandate potentials. To wit,IOER (interest on excess reserves) and RRP (reverse repo) are far more potent tools for raising rates. Raising FFR will not reverse the affect or effects of IOER (bank disintermediation, interest rate and monetary transactions velocity suppression) and RRP (the overnight price of all collateral parked at the Fed, dwarfing FFR in dollar volume at 10 to 1 on average).
All three tools will have to be utilized in the Fed's unwinding of multiple doses of QE. To counter QEZIRPIOER effects, the main goals should be an overall yield curve increase, steepening, and a reincentivizing of banks being in the lending business, rather than the savings business, through a reduction in the IOER and RRP arbitrage or carry trade. And yes, whether the Fed raises FFR or not, there would be pain. How much pain?
Again, there are mitigating circumstances... QE has sequestered the turnover rate of the monetary supply; is not expansionary; is economically contractionary; and the taper off of multiple doses of QE, like certain recreational drugs, can be very painful.
If IOER and/or RRP remuneration is increased, this would further encourage parking funds at the Fed and promote the status quo of tax payer funded bank welfare, bank disintermediation; a low monetary velocity turnover, replete with economic malaise (the secular stagnation of media narrative). In other words, no pain, no gain and more of the same.
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Summary
Discussion of economic affect or effect of RRP (reverse repo) and IOER (interest on excess reserves).
Analysis of an apparent systemic shortage in short term HQLA (high quality liquid assets).
Analysis of potential effects on the interest rate curve of 10 year UST supply and increased scarcity premiums in short-term on the run collateral.
Analysis of Fed Balance Sheet Asset Liability Maturity Mismatches and What might QE4 look like?
In Part 2 we concluded:
FFR (fed funds rate) is a tool for anchoring public and market expectations, not necessarily realizing mandate potentials. To wit,IOER (interest on excess reserves) and RRP (reverse repo) are far more potent tools for raising rates. Raising FFR will not reverse the affect or effects of IOER (bank disintermediation, interest rate and monetary transactions velocity suppression) and RRP (the overnight price of all collateral parked at the Fed, dwarfing FFR in dollar volume at 10 to 1 on average).
All three tools will have to be utilized in the Fed's unwinding of multiple doses of QE. To counter QEZIRPIOER effects, the main goals should be an overall yield curve increase, steepening, and a reincentivizing of banks being in the lending business, rather than the savings business, through a reduction in the IOER and RRP arbitrage or carry trade. And yes, whether the Fed raises FFR or not, there would be pain. How much pain?
Again, there are mitigating circumstances... QE has sequestered the turnover rate of the monetary supply; is not expansionary; is economically contractionary; and the taper off of multiple doses of QE, like certain recreational drugs, can be very painful.
If IOER and/or RRP remuneration is increased, this would further encourage parking funds at the Fed and promote the status quo of tax payer funded bank welfare, bank disintermediation; a low monetary velocity turnover, replete with economic malaise (the secular stagnation of media narrative). In other words, no pain, no gain and more of the same.
This missive was published as an exclusive to Seeking Alpha. To access the ENTIRE text for FREE on Seeking Alpha, please click here. The Nattering One does not receive remuneration if you register, only satisfaction.
There is no cost involved and it has been our experience that if you exert control (by unchecking a box of two) over your communications settings in your Seeking Alpha profile, your email inbox will not be polluted with one bit of Spam (not even the cured pork shoulder variety. Tasty even.)
As we are now a "contributor" at Seeking Alpha, our published articles, instablog and comments can be found here. Please continue to follow The Nattering Naybob here and at Seeking Alpha. We thank you for your support.
This missive was published as an exclusive to Seeking Alpha. To access the ENTIRE text for FREE on Seeking Alpha, please click here. The Nattering One does not receive remuneration if you register, only satisfaction.
There is no cost involved and it has been our experience that if you exert control (by unchecking a box of two) over your communications settings in your Seeking Alpha profile, your email inbox will not be polluted with one bit of Spam (not even the cured pork shoulder variety. Tasty even.)
As we are now a "contributor" at Seeking Alpha, our published articles, instablog and comments can be found here. Please continue to follow The Nattering Naybob here and at Seeking Alpha. We thank you for your support.
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