Low Rates Forever
Nothing much is happening in the money world. The press reports that traders are hanging loose, wondering what dumb thing the Fed will do next. Rumor has it that it may decide to raise rates in September, or maybe November… or maybe not at all.
So far, the Fed has hiked the FF rate just once, by 25 basis points. That hardly matters though, since the Fed maintains its balance sheet at the bloated level reached after three QE operations. Banks are holding large excess reserves as a result, and the federal funds market is therefore a mere shadow of its former self. The FF rate has no practical significance anymore – the effect of rate hikes is mainly psychological, due to the feedback loop between credit markets and the Fed’s policy stance. It cannot influence the activities of banks that no longer need to borrow reserves in order to expand credit. In short, although Fed policy is relatively ‘tight’ compared to that of other major central banks at the moment, it remains extremely loose considered on its own – click to enlarge.
It hardly matters. The Fed has created an unnatural, hothouse economy. Neither banks, nor business, nor investors fear a frost. None suffers drought or flood.
The feds have worked so hard, for so long, to protect them from the real, outside world. Now, they can only survive in the strange world where light, water, and temperature are all controlled and they can get the Miracle-Gro of money at the lowest rates in 5,000 years.
Open the doors? Turn off the water? No chance. The Fed will never, ever return to normal market-discovered interest rates – at least, not willingly. There are too many precious orchids in that hothouse.
This post was published at Acting-Man on August 31, 2016.