Thursday, February 18, 2010

The Fed Did Not Raise Rates

Did the Federal Reserve just come out and surprise the world with a "rate hike"? Technically, yes. It all depends on what "is" is. Read the official press release.

Notice this isn't really changing the fundamentals. What really happened was they removed some of the recent "emergency" measures.

On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days.

As we pointed out in "Credit Spreads Expected to Narrow", the business cycle is alive and well. The Federal Reserve basically just sent out a press release to that effect. They've restored the spread and duration to pre-crash conditions. Yea, the spread is still not quite there, but hopefully you get the picture.

This is a change at the discount window and TAF, not fed funds. Bernanke is pushing up that rate to force banks to suck up the fed funds and entice other bond holders to find repurchase funding in the commercial paper markets. We predict it won’t have any impact on lending costs just as they say (since fed funds are still over-supplied), but to the extent the public believes this is something big, there’s some good shorting opportunities for the next day or two.

This is more to do with normalizing the old methodologies than a real rate policy change. The daily Fed Funds market shows no signs whatsoever of "improving conditions" as far as market interest rates in ring-zero financing is concerned.

All through the policy changes leading up to market collapse the Fed Funds data revealed policy changes in the days leading up the public announcements. Expect to see something move there, too, before any real rate increases happens in monetary policy. As it stands the current news is just getting a few markets back to pre-crash normality.

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