The Fed's Devil In The Details

Summary

Discussion of the FOMC actions taken on Dec 16th, 2015 and their potential effects on equity, bond, commodity, capital and asset markets.

Brief discussion of the FOMC announcement and implementation details.

Brief discussion of the effects of further squeezing of the "dollar".

"The greatest trick the Devil ever pulled, was convincing the world he didn't exist. And like that, he's gone." - Verbal Kint - The Usual Suspects

Many were focused on the FOMC rate decision of January 16th, 2015. Would they raise or not, and if so how much? Would the statement be dovish or hawkish? Would markets be pleased or not? Lost in the shuffle of the crowd, the Devil in the details.

In brief, this is the third in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.

IMHO - Key Phrase in the Fed Speak of December 16, 2015

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. "

To find the "Devil" in the details, one must always read the fine print. Here is the fine print in the implementation statement…

"The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015."

"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting."

"In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015."

By reading the fine print found above, we find that in effect the Fed not only raised the FFR (Federal Funds Rate) but also raised the discount rate, IOER (interest on excess reserves), RP - repo and RRP (Reverse Repo) rates all by 25 bps.  What does that mean?

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