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Monday, September 15, 2008

Losing Control? Fed Funds Climb to 6%

“If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent.” –Stan Jonas, Axiom Management Partners

The Fed may be losing control here. They’ve flooded the banking system with $70 billion in temporary reserves and that only took the rate for overnight loans between banks down to 4% from a high of 6%. The target is 2%...

Fed Funds Climbs the Most Over Target Rate in Decade (Update1): “The rate for overnight loans between banks soared to its greatest margin over the Federal Reserve's target rate in at least a decade as banks hoard cash after Lehman Brothers Holdings Inc.'s bankruptcy.

Fed funds traded as high as 6 percent, or 4 percentage points above the target rate, according to ICAP Plc, the world's largest inter-dealer broker. The difference is the greatest since Bloomberg began tracking the data in 1998. The rate dropped to 4 percent after the central bank added a total o of $70 billion in temporary reserves to the banking system.

The central bank uses repurchase agreements, or repos, to buy or sell Treasury, mortgage-backed and so-called agency debt for a set period, to help maintain enough money in the system to keep overnight interest rates close to the target. They don't signal a policy shift. Futures show traders boosted odds to 68 percent that the Fed will cut rates when policy makers meet tomorrow to offset financial market turmoil.”

Why equities aren’t in a death spiral is beyond me. My guess is they will be soon enough…

“The Fed widened the collateral it accepts yesterday for loans to securities firms in an effort to help Wall Street weather Lehman's bankruptcy.

The Fed added $50 billion in temporary reserves to the banking system when it arranged overnight repurchase agreements, or repos, at 11:50 a.m., after providing $20 billion earlier.

When the Fed added the reserves at 9:40 a.m., federal funds, the overnight lending rate between U.S. banks, traded at 4.25 percent, above the central bank's target rate, according to ICAP. The rate was 6 percent at the time of the second open market operation. Fed funds opened at 3.5 percent today.”


Anonymous said...

Thanks! I am completely floored that the Fed funds rate traded up that high. Let's see what it closes at - it closed 1.56% above the target June 30, 1998 and that was when the target was 5.5%. Hopefully the Fed has its checkbook out, because it looks like that is the only place where banks can secure funds - at least those allowed to the Fed discount window.

Anonymous said...

Why do you think the market is not down more?

Doug said...

Yeah the market should be in free fall if this is the case. These are market crash type numbers here folks.

Ben Bittrolff said...

I guess we crash in slow motion...

Anonymous said...

the slowest and most controlled of all implosions..
that way, the ones in control can benefit even more..

good ole` Hank & Ben...

Anonymous said...

Nor, this shows that those who think or thought that they were in control, in reality are not.
Hence the fear.

Mista B said...

I'm not surprised we haven't seen a major crash yet. While I do think the U.S. markets were (and still are) overvalued, I don't think they were in a classic bubble (unlike the Chinese market). It usually takes such euphoria to turn into a mass exodus. There are a lot of bears out there clearly. Today there was a spike in volatility, the TED spread, and the put/call ratio. So there's good reason to think the market is heading higher in the near term. That said, I fully expect earnings to disappoint for a good while, thus I expect the market to grind consistenly lower.

Part of what I do is 401k business, and I'm not seeing panic from investors (though we had been allocating away from value, foreign, and equities altogether). I honestly believe we're still in the early innings, possibly two years from a bottom. After all, we still have the Alt-A and CRE messes to deal with. How in the world is the financial industry going to absorb those losses when they're already completely screwed? Answer: they're going to sell everything they possibly can. That's when we see the truly low levels. 7k to 8k on the Dow is fair value imo. 5k would be cheap. Don't know if we'll get there, but I'd definitely like to see another 30% lopped off. I doubt it'll be in a crash though. This is nothing like 1987, when prices were miles over the 200-week moving average. They're now under. If we do see a crash, that's when we'll likely see a follow up bounce.

Anonymous said...

FDFD:ind...The quote is at 0.25%..Can somebody explain? +6% to 0.25%...Wow

Anonymous said...

We could see a a systemic risk event occur very soon -- a financial system breadkdown as referred to on May 1, 2008 by Assistant secretary of the U.S. Treasury Anthony Ryan in Remarks at SIFMA “Wall Street to Washington” Conference where he said due to "settlement failures, or fails, occur when a party selling a security fails to deliver the security to the buyer on the agreed upon settlement date. Settlement failures, occur for a variety of reasons including errors in the back office and miscommunications, and are generally small and resolved quickly. Larger, more chronic fails can occur due to wide-scale operational disruptions or financial market conditions, such as when interest rates reach low levels".

Anonymous said...

The reason we are not seeing a straight crash I.M.O. is because the central banks are still willing to "buy" all the thrash paper so it is never priced in the market. Thus the real losses are at least postponed.

This policy will keep the downturn grinding on and on and on - because nobody (sane) are willing to lend at present interest rates to "people" that are clearly in the hole; but we cannot tell by how much because the FED et. al. have hidden all that information away from the market.

I think the bottom will not come in before 2012-2015 and it will be a lot lower than now!

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