Guest Post by Paul Craig Roberts
The Federal Reserve raised the interbank borrowing rate today by one quarter of one percent or 25 basis points. Readers are asking, “what does that mean?”
It means that the Fed has had time to figure out that the effect of the small “rate hike” would essentially be zero. In other words, the small increase in the target rate from a range of 0 to 0.25% to 0.25 to 0.50% is insufficient to set off problems in the interest-rate derivatives market or to send stock and bond prices into decline.
Prior to today’s Fed announcement, the interbank borrowing rate was averaging 0.13% over the period since the beginning of Quantitative Easing. In other words, there has not been enough demand from banks for the available liquidity to push the rate up to the 0.25% limit. Similarly, after today’s announced “rate hike,” the rate might settle at 0.25%, the max of the previous rate and the bottom range of the new rate.
However, the fact of the matter is that the available liquidity exceeded demand in the old rate range. The purpose of raising interest rates is to choke off credit demand, but there was no need to choke off credit demand when the demand for credit was only sufficient to keep the average rate in the midpoint of the old range. This “rate hike” is a fraud. It is only for the idiots in the financial media who have been going on about a rate hike forever and the need for the Fed to protect its credibility by raising interest rates.
Look at it this way. The banking system as a whole does not need to borrow as it is sitting on $2.42 trillion in excess reserves. The negative impact of the “rate hike” affects only smaller banks that are lending to businesses and consumers. If these banks find themselves fully loaned up and in need of overnight reserves to meet their reserve requirements, they will need to borrow from a bank with excess reserves. Thus, the rate hike has the effect of making smaller banks pay higher interest expense to the mega-banks favored by the Federal Reserve.
A different way of putting it is that the “rate hike” favors banks sitting on excess reserves over banks who are lending to businesses and consumers in their community.
In other words, the rate hike just facilitates more looting by the One Percent.
by Karl Denninger
Yellen, You’re Nuts (And You Pulled The Pin)
It’s time to break out the single-malt.
The reason is quite simple: The effective fed-funds rate has been running at 0.15% for a bit now. To “raise rates” to 0.25% the net change in system liquidity required is about 60%.
This is math folks. It’s the reason The Fed has a monstrous balance sheet; they had to in order to influence rates the way they wanted to on the way down. But to reverse that policy you must unwind that which you did in exactly the same sort of fashion.
Yellen says they’re going to keep the “huge” balance sheet until normalization is “well underway.” The problem is that math doesn’t care what you want, it just is. Further, the entirety of the Fed Balance Sheet is not the sum total of systemic liquidity, not by a long shot.
So how much does The Fed have to drain themselves? I don’t know and neither do they. But that they have to reduce the amount of the “overfill” in the liquidity pool by some 60% isn’t conjecture, it’s arithmetic.
We’ll see if the EFF actually moves in coming days as they “desire” and where the drain comes from.
But this much is certain: If the rate does move, the drain will have occurred somewhere.
Meh! All you need to know is that the idiots who broke the system, aren’t going to be the same ones who fix the system.
I’m am curious to see where metal goes from here. So far silver only twitched and Au seemingly never noticed the news.
The establishment is about out of smoke and mirrors. They will keep the charade going as long as they can but there are so many flys in the ointment now that it has to be replaced. Most average “Joe’s” don’t care, they have been conditioned by the media to accept everything thrown at them. It is gonna be a hard landing!
So will the .01% interest on my savings account now move up to say .02%?
I am enjoying watching the bond market go from a slow plummet to an avalanche. We now have 4 funds refusing redemption with a market cap of 22 billion.
A while ago I was listening to an NPR spot where the 2 talking heads were discussing the markets. One ditzy bitch said ” lack of liquidity in the bond market ” and the other duschenozzle says ” what does that even mean: ? Then everyone laughed and made fun of some conservative blogger who said doom is upon us.
Dear NPR. This is what a ” lack of liquidity in the bond market looks like ” GET IT?
Of course any idiot in junk bonds gets what they deserve……….
It has been a little more that four years since I first “woke up” to the realities of our economic system. The levels of fraud, debt, and pure bullshit that makes up its very foundations.
Immediately recognizing the accuracy of the math presented and the incredible instability such a system inherently represents, I expected the whole thing to go off the rails within weeks.
For years later and literally thousands of articles about collapse later, here we are. The Dow has gone up 40% or more, the government has raised the debt ceiling several more times, the trains run on time, the power grid has had no major glitches, I can still drive anywhere on well-maintained roads and buy virtually anything I can even imagine with a little plastic rectangle without ever removing may ass from the couch. Not to mention, I can instantly learn virtually any piece of information the world over, again while maintaining complete assal horizontology.
There are two points I take from this:
First, the way we all live our lives is, in a historical context, ridiculous. Even the richest, mightiest kings or Pharaohs of old could not imagine such decadence. Yet, in our day-to-day perspective, it seems entirely normal and even something we “deserve.” And it seems eternal. I know it is unsustainable, ludicrous and doomed, but it is still hard to imagine a world without it.
Second, it sucks to have been and remain so consistently wrong in my predictions. I could never have imagined, four long years ago, that the system would still be so undisturbed as we reach the end of 2015.
How many more fucking rabbits can the Fed, the Deep State, the Banks, et al pull out of the fucking hat?
Today’s rate hike means Peter Schiff needs to go away!
Looks like metal prices are responding nicely! Silver is back below $13 and gold is likely headed below $1000! Might just be a shiny Christmas!