Let’s talk rates. Wait! Don’t go! I know I’m a broken record but you have to see this. Every time the Fed gets together for an Federal Open Market Committee (FOMC) meeting, the media and the markets scurry about to talk about the Fed rates. Up or down? Did the market “price in a cut” already? Did anyone dissent? How did the markets respond?! What does it mean for borrowers?
And then, the conversation stops only to be revisited the next time the Fed gets together. But rates tell a continuous and relentless story about the nature of the economy. Rates tell us how other countries feel about the way we handle things. They tell us how the capitalist markets think consumers are doing. They determine who gets a house or a car.
There are two competing narratives, totally at odds with one another when it comes to who controls rates. Sometimes the government likes to pretend that it’s completely in control of rates. Other times the government likes to pretend that rates are set by the invisible hand of the marketplace. The truth is somewhere in between. The Federal Funds rate is more of a suggestion than a fixed rate but it certainly serves as a guide; or more precisely, a range.
When the Fed sets the Federal Funds Rate, it’s not a fixed rate of borrowing. It’s a range—a very small range of a quarter of a percent usually. This is the range it sets for overnight lending between banks. That’s it. It has nothing to do with you, your auto loan, student debt borrowing rate or mortgage. But the theory holds that this baseline cost of capital provides a benchmark for the market to set its expectations against. So let’s give a couple of examples before we talk about the broken plumbing of the system.
Everyday banks, non-bank financial institutions and investors track rate movements across a spectrum. The Fed Funds Rate is the one we mostly hear about. But there’s also the Secured Overnight Financing Rate (SOFR), Reverse Repo Award Rate (RRP), Interest on Reserve Balances (IORB), The Discount Rate, Prime Rate—those are the big ones but there are others, particularly when you get into international rates and currency.
We’re going to explore this more in a MeidasTouch video this week but the point is to illustrate the variety of rates that matter in the market.
The Federal Funds Rate range is important. I don’t want to suggest that it’s not. It’s a guide for the market. The Prime Rate is based upon it. In this way it’s important in practical terms and for optics. And when the actual rates in the banking system fall within this range, the Fed has the ability to claim that it’s in control.
Now for the plumbing problem.
The market isn’t cooperating with the Fed right now. The rates being offered in the overnight markets are higher than counterparties want to pay. The result is that financial institutions are increasingly looking to the Federal Reserve to supply liquidity within the “band” that it sets.
This gets us back to the “repo market” discussion. These are exchanges where the Fed can either inject or extract funds temporarily by selling or purchasing securities. What you see in the chart above is banks turning to the Fed to settle overnight transactions, which means one of two things: Either the rates offered from the usual intermediaries are too high for comfort, or they don’t have it.
This has led observers to note that the Fed has “lost control” of interest rates in the market, and that we might be on the verge of a massive liquidity crisis. The real story probably lies somewhere in between. But the bottom line is that this facility isn’t supposed to be used in this way and is rarely, if ever, used outside of quarter-end periods when banks are looking to shore up their reserve requirements ahead of reporting.
Now, not to bury the lede but last week was bad. Really bad. At the very right of the chart you can see the tall blue line, which indicates the amount of money supplied by the Federal Reserve on October 31. It was $50 billion. In the grand scheme of trillions of dollars changing hands it’s not a lot. But it’s a really big deal because the Fed released $20 billion in the morning session and another $30 billion in the afternoon. That’s fairly unprecedented.
While you won’t hear much about it in the general news, you can bet that all eyes will be on this facility in the weeks ahead.
Other things I’m obsessing over…
Our A-Hole of the week goes to the Bride of Frankenstein Kate Miller for literally warning Cenk Uygar of The Young Turks to check his citizenship status.
Kash Money Patel **Bling Bling, Check One Two** picked up his lady for a night out on a private jet and dropped her back off in Nashville like a fucking G! Now that’s our tax dollars at work.
If you get a chance, check out Kathryn Bigelow’s latest government thriller A House of Dynamite. (Personally, I thought it was awesome.)
If you haven’t seen it, it’s about the 20 minutes before an apparent nuclear strike on the continental United States, and the chaotic decision making that occurred surrounding it. I guarantee that Trump got wind of the movie and that’s why he’s reviving the possibility of nuclear tests.
-Max
Killer Left Take of the Week
KLTW goes to Marc Lamont Hill of Night School. It’s hard to believe this is still a topic but the right wing won’t let it die. Though it’s several stories beneath the intellectual edifice that is Dr. Marc Lamont Hill, he appeared on the Piers Morgan program to do the lord’s work and teach us all how to respond to the persistently insipid question “what is a woman?”
Stephen Miran isn’t auditioning to run the Federal Reserve. He’s auditioning to destroy it. Like so many in Trump’s sphere, Miran was selected for his ability to appear like he’s doing the right thing and making the tough choices. In reality, he exists to destroy the thing he’s spent his entire life trying to be a part of. Miran is a highly educated and competent analyst whose academic veneer and projection of empathy belie his craven desire for power and to eradicate the independence of the Fed and place it under direct authority and control of the president. And make no mistake, when Jerome Powell’s term is up, this is who will be in charge of the Fed.
Here’s a snippet from the pod:
Max: Currently, Fed governors can only be removed “for cause”—meaning gross misconduct or incompetence, not just because the president doesn't like their policies. Miran wants to eliminate that protection. He argues that recent Supreme Court decisions are pointing toward a world where the president has the authority to fire any executive branch employee at will—and he believes the Fed should fall under that umbrella.
We’re digging into rates a lot lately because they tell a story that narratives can’t fudge. There is a housing affordability crisis and a supply issue (sort of). We’ll talk about the supply side another day, but the narrative about housing is that the Federal Reserve needs to reduce rates in order to pull down mortgage rates. But that’s not how it works.
Mortgage rates are set by the market, but they most closely track the 10 year treasury yield. Because people refinance and there are always new mortgages being written, the 10 year is the closest approximation the market can get on long-term debt holdings like mortgages. 30 is too long. 2 is too short. 10 is the Goldilocks number. But the real story is in the spread.
As you can see from the trendlines, they track closely in terms of directional movement, but sometimes they pull closer together. Other times they drift slightly apart. So even though rates are coming down, you can see that the spread between them means that mortgage rates are still elevated above that 6% rate. That’s a frustrating spot for home owners with an existing mortgage below this rate because they’re sort of stuck in a rate limbo. And it’s a terrible spot for first-time home buyers because rates haven’t been this high for 17 years.
The bottom line is that they can pull the Federal Funds rate down all they want but if the market isn’t feeling it, it won’t matter.
Headlines
Minerals, Whites and Christians
The admirable effort to draw attention to the suffering and slaughter in Gaza has overshadowed the horrors that continue to unfold in the Darfur region. As President Trump rages online about Christians in Nigeria and opens migration for white South Africans to come to America, the British/UAE backed genocide in Sudan continues with nary a peep from the United States. Sadly, this war-ravaged part of the world doesn’t contain anything that we find precious.
From the article:
“Britain ‘pressured African governments not to condemn the UAE [United Arab Emirates] for their role in supporting the RSF, [Rapid Support Forces]’ he added. After all, the RSF is using British-made military equipment, likely supplied to it by the UAE. Chad, Ethiopia and Gen. Khalifa Haftar in Libya are helping the UAE smuggle weapons into RSF-controlled territories and smuggle out the gold mined from mineral-rich Darfur to Dubai, Kaballo said. The UAE ‘is the main beneficiary of the chaos and the destruction we are seeing in El Fasher.’”
Recruit out-of-work Proud Boys to wear masks and beat the shit out of immigrants. Check. Now to part two of this nightmare. Use surveillance to track immigrants and put a bounty on their heads. Last stop will be a reality show.
From the article:
“According to the document, which solicits information from interested contractors for a potentially forthcoming contract opportunity, companies hired by ICE will be given bundles of information on 10,000 immigrants at a time to locate, with further assignments provided in ‘increments of 10,000 up to 1,000,000.’”
We’ve said it before but the blue states can hold out way longer than the red ones under Trump. It’s a tragic irony, I suppose. As the gilded administration of the nation’s biggest grifter carries on in opulence and faux grandeur, the suffering masses that put him there fall further behind.
From the article:
“These changes would fall disproportionately on some of Trump’s most loyal supporters in red states. Most affected would be 50- to 60-year-olds without a high school or college education who have, for decades, toiled in physically grueling jobs, including coal mining, logging, and factory and construction work. The five states where the highest proportions of people rely on these benefits are West Virginia, Arkansas, Kentucky, Mississippi and Alabama. Unlike New York, California and a few others, these states do not have their own disability insurance programs for workers to turn to amid federal cuts.”
Marco Rubio sailed through his confirmation 99-0 while Democrats looked the other way. Now he’s accumulated more power than any Cabinet member since Kissinger—and he’s using it to push the U.S. toward regime change in Venezuela. The military buildup is already underway, and the playbook looks eerily familiar to the lead-up to Iraq.
“John Fugelsang is a political commentator and author of Separation of Church and Hate: A Sane Person’s Guide to Taking Back the Bible from Fundamentalists, Fascists, and Flock-Fleecing Frauds. He joins Current Affairs editor-in-chief Nathan J. Robinson to discuss how right-wing Christian nationalism has twisted the teachings of Jesus into a tool of hate and domination.”
“Life under capitalism. Rampant debilitating denial for the many next to vile enrichment of the few. Material deprivation, denial, and denigration. Dignity defiled. Michael Albert’s book No Bosses advocates for the conception and then organization of a new economy. The vision offered is called participatory economics. It elevates self-management, equity, solidarity, diversity, and sustainability. It eliminates elitist, arrogant, dismissive, authoritarian, exploitation, competition, and homogenization. ”
“The host says, ‘we can still stop him,’ but YouTube says, ‘a major a stop at Bob’s Discount Furniture on the way.’ I really need to start screen recording more because the ad breaks and timing of them is insane.”
At 84, Bernie Sanders remains one of America’s most tireless champions for the working class—from winning his first race by 10 votes on an anti-corporate message to barnstorming the country today warning against oligarchy. His consistency is unmatched: the same fight against wealth concentration and corporate power that defined his mayoral campaign still drives him nearly five decades later.
“The Ruckus Society is a multi-racial network of trainers dedicated to providing the necessary tools, preparation, and support to build direct action capacity for ecological justice and social change movements. It works with Indigenous communities and other communities of color working to preserve their homes and environments and for climate justice.”
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