Surprise Funds Rate Cut By Fed Imminent?
Heads-up to a developing situation:
Credit is crunching again, and banks are having liquidity problems- the Fed did $31.25 billion in Repurchase Agreements today. That sounded like a lot, so I went to the Federal Reserve Bank of New York website and copied the daily figures into Excel from August 1 thru today. Here’s what a quick chart of those figures shows:
Clearly something is up. Another point of interest- of the $31 billion in repos today, the Fed accepted $4.1 billion in the infamous mortgage-backed securities. Contrast that to August 10th, when they accepted that moldy paper for all $38 billion worth of repos.
So, the banks are in a temporary liquidity crisis, but it’s not because the MBS market is locked up and no one will buy the moldy paper. That doesn’t sound good…
Now for the next bit of chartage. The market is suddenly expecting a large amount of permanent money to be added to the system. This is reflected in the spike in the price of gold and the drop of the dollar against the euro. Here’s gold:
Credit Crisis anew. Permanent money. Sounds like only one answer to me: a cut in the Funds Rate. I had already publicly said that I felt the Fed would try to wait until the 9/18 meeting to cut, so as not to spook anyone. Today’s data leads me to believe they may not be able to wait that long.
Cheers.
Bruce said,
September 7, 2007 @ 7:59 pm
Just like the folks on CNBC I believe you are misinterpreting the Fed data by implying that the Fed is pouring in liquidity to save the economy. I have tracked the Fed flolat through their injections regularly for years and what the folks talking about this data do not fully explain is that in most cases the injections are not permanent injections (POMOS) they are loans that are repaid by a certain day. Sometimes these are overnight, 3 day, several days depending on the needs of the banking system and what the Fed thinks should be loaned out. You mention that the Fed injected a whopping $31.5B today making your readers think this is a major move by the Fed. In reality, there was $30.25B of earlier repos expiring on the same day making the net injection only $1.25B.
The current Fed float on that day was $36.25B which is far less than the over $50B the Fed was pumping during the Spring market rally. Funny how nobody was mentioning this data then or discussing a liquidity crisis. In late July/Early August the Fed allowed the float to get down to the $18B area.
Sop before you join the bandwagon of the TV talking heads and misinterpret data to make your readers think that the Fed is addressing a major liquidity crisis, please get you facts straight. These numbers have been business as usual for the Fed for years. The only thing different is that the Fed made a public effort to make people aware of the “so called” injections to create a feeling that the Fed is coming to the rescue. In reality they ahve been doing nothing extra and the current injection/float level is substantially lower than in the Spring when everything was wonderful with the market hitting new all time highs and there was no liquidity crisis to fix.
Will said,
September 8, 2007 @ 12:15 am
Bruce- Wow, thanks for the nice long comment. I explained in the first link of this post that repos are, by definition, temporary, although instead of a textbook definition like the one you kindly supplied, I used a guy named Bubba and had Bernanke wearing a Cat Diesel Power cap. Check it out.
As I understand it, except in an emergency ala 9/11/2001, the “overnight” repos (1-14 days) are used to maintain the target Funds rate, and can therefore be viewed as an indicator of how much “temporary” cash is required on any given day to keep the banks lending to each other at/near that Funds rate (i.e. how much “grease” the wheels of finance need that day to keep from seizing up).
The expiring repos are simply the grease that was needed in the past, and the Fed shouldn’t be acting to “cover” them unless those expirations would knock the actual rate away from the target Funds Rate, in which case the wheels still need that old grease as well as some fresh. So it seems to me the gross daily repo figure can still be used to discern how much temporary cash is needed to keep the Funds Rate near Target, whether that cash is covering expiring repos or not.
If the Fed were trying to “save the economy,” they’d be using the bigger guns of large Funds Rate cuts or perhaps even modifying reserve requirements, and making long-term changes to the money supply. In case I haven’t been clear on it, I don’t believe there exists a “Bernanke Put.”
I’ve gone ahead and spent the 45 minutes it took to manually type in the daily repo figures back to January 1 (know where I can DOWNLOAD this stuff?)… and here’s what I’ve got:
Top Ten Repo Days 2007 (sum of one-day to 14-day repos)
I’d be very interested in learning why I shouldn’t consider yesterday (9/6) being #2 on that list to be significant. Whopping, even.
Thanks for the visit- I appreciate your input, and please know that I’m often wrong and always open to learning (although I’m pretty thick). And I don’t like CNBC at all since Liz left, except for Rick Santelli and Erin Burnett when she’s wearing something cute.
Bruce said,
September 8, 2007 @ 6:39 am
Will, I will see if I can add more thoughts later but my main point still stands. If you take Thursdays expiring repos and subtract them from the whopping injections you mentioned, the net change on the day was an addition of $1.25B. Sometimes the Fed presses a little on the petal over time to control the overall float and economic (market) conditions and at times they decide that they want to keep things status quo. So the Expiration of $30B of previous repos made up of 1 to up to 65 days of expiry just happened to coincide on that day and the Fed decided that they needed to keep the float at the current amount plus $1.25B. As a single data point I the point that you are making about a single mega day injection is nor proper. Nothing changed that day except for an injection of $1.25B which is what they do on a regular basis.
Instead of looking at daily injection data points which in my mind dont have any significant meaning, I think its wise to monitor thee daily float and watch for trend changes there. If you are looking for meaningful single data point Fed injection data I think the only meaninful injections are POMO’s, permanenet market operations which is on a different Fed web page than the temporary injections. Additonally you might want to look at the actual interest rate that the temporary operations are loaned at.
By the way, I agree with you regarding Liz and CNBC but Erin has captured my attention and seems to be smart as well. Alas, nobody can come close to replacing Liz. There is very little if anything that is said on CNBC that helps my trades and I usually just ignore the news.
I have to run. I will have more to add to this topic a little later that you might find useful.
Will said,
September 8, 2007 @ 11:51 am
Bruce - I see what you’re saying. I’ve taken that same spreadsheet (although it’s 1-14 day repos, not out to 65), and ran a column for “today’s amount, minus “one-days” expiring from yesterday, minus “two-days” expiring from the day before, etc out to 14 days. That way I calculate the net daily change in the float you speak of (although I wish there were a different term, as you know float in relation to the Fed still implies check-clearing delays, which are basically insignificant anymore).
I then add or subtract that net daily change from the previous day’s balance (started at 0 in January), and the overall amount of “grease” loose in the economy becomes evident.
I will write a post with this information soon. Working till 9pm tonight and tomorrow though, dammit.
Thanks again for the dialogue.
Bruce said,
September 8, 2007 @ 4:22 pm
Will:
Here is an interesting chart to get you started. I’m working on getting an updated one for you.
http://www.marketswing.com/forum/attachment.php?attachmentid=6762&d=1183387259
The guys at the marketswing guys do a great job of tracking all of this on a daily basis. Maybe this will save you some work…
http://www.marketswing.com/forum/attachment.php?attachmentid=6762&d=1183387259
Go to topic 3, Money Supply, REPOs and Federal Reserve Daily Actions for the daily update.
By the way, the folks I chat with refer to it as float…which is the amount of money the Fed has injected into the system through open market operations. Those loand get paid back on the day of expiry. I also mentione 65 days because Fed temporary injections can be for any duration up to 65 days.
Cheers