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Barrage Of Crucial Data To Test Market Calm, Fed Message In New Week
If the Fed is intent on taking a pause after the third rate cut in what policymakers have been keen to characterize as a "mid-cycle adjustment", the October meeting might be a good time to convey that intention.
After a rocky start to the month, a calm settled in following progress on trade and movement on Brexit, which collided with lopsided positioning to trigger a rally that pushed US stocks back to the highs, and equity volatility back to levels seen prior to the August turmoil.
And it's
Keep money market funds in mind when pondering the Fed lowering rates; here’s a FRED chart showing changes in flow. This is fairly interesting,as it looks like people are getting spooked and moving cash away from treasuries, and of course, that’s what happened back around 2009. If the Fed is bullied into lowering rates it really does seem like it’s a Catch-22, where their damned by trump’s MAGA miracle stupidity, i.e., they can’t cut, stay put or do anything useful — and any message they send will be useless, which more than likely will result in people feeling more and more cautious as they ponder risk and recession and impeachment impacts. Maybe Powell can offer a hint as o how the Fed will deal with the deficit and impeachment?
Money market funds; total financial assets, Flow, Millions of Dollars, Seasonally Adjusted Annual Rate (MMMFTAQ027S)
Money market funds; Treasury securities; asset, Flow, Millions of Dollars, Not Seasonally Adjusted (BOGZ1FA633061105Q)
https://fred.stlouisfed.org/graph/?g=plTm
A few exchanges below on Fed reserves from an old Fed transcript, which offers a few hints about flow (Conference Call of the Federal Open Market Committee on August 1, 2011). There are obviously more recent chats about this topic, but this one is of interest with FDIC, Treasury and tons of agencies in panic mode)!
MR. FISHER. Mr. Chairman, I presume that the effect of the money market funds’ activities that Brian mentioned is reflected in an increase in excess balances held by us. Is that correct, Brian?
MR. SACK. The aggregate amount of reserves in the system isn’t going to change, but this is a change in the flow of those investments. So essentially, the money funds are taking money out of repo, and actually out of some bank liabilities, and increasing their holdings of deposits at other financial institutions
MR. ENGLISH. One thing that could happen if policy were being implemented in more or less the usual way is if people wanted reserves, they’d push up the federal funds rate, and the Desk, in responding to the higher federal funds rate, would be adding reserves, and so potentially the supply of reserves would be elastic. Now, how elastic it would be in that situation I’m not sure, but the Desk would be aiming to keep the fed funds rate at the target level, and a high demand for reserves would lead them to add reserves
MS. DUKE. (Wells Fargo current chairman and former Board of Governors of the Federal Reserve System) I guess my question, though, is if deposits are flowing in everywhere, I can see who would want to lend reserves. I just can’t see who would want to borrow those reserves.
MR. ENGLISH. That’s exactly the point. People would want to accumulate the
reserves, so the demand for reserves would be higher
MS. DUKE. Thank you, Mr. Chairman. I’m fully in support of items 1 through 5. With respect to 6 and 7, I’ve said before and I’ll say again here, I think we should consider expanding
the short-term money markets, including the repo markets, that are subject to our rate targets. With the size of our balance sheet and the fact that we’re paying interest on reserves, we’ve actually taken over the traditional fed funds market. Both of these scenarios contemplate rates in
other short-term funding markets moving outside of the fed funds target, so I think that actions that are necessary to move those rates back inside the target would be appropriate and could include the purchases of Treasury bills.
MR. SACK. The aggregate amount of reserves in the system isn’t going to change, but this is a change in the flow of those investments. So essentially, the money funds are taking money out of repo, and actually out of some bank liabilities, and increasing their holdings of
deposits at other financial institutions.
MS. DUKE. Just one hypothetical question. If they were investing all of this run-up in deposits in reserves at the Fed, if our balance sheet wasn’t so large, if those reserves weren’t available, where might they have invested them? It seems to me that the reserves are an attractive investment because they can be redeemed at par. So would that be something that we might look at as a tool in the toolkit if this were to happen in a future situation where there weren’t so many reserves in the system?