set me straight on FED funds rate

[Spartacus]

What are the mechanics of borrowing at the 3 month T bill rate?

if the 3 month T bill rate is lower than FED Funds, why would anyone borrow from the FED?

Since you can't lend to the FED (I assume you and I can't) at 5% using funds borrowed at the 3 month T bill rate,

therefore it
Seems to me the only way the FED funds rate could have any real effect is when their rate is below free market rates

Otherwise it's just a number with no meaning,

[metalman]

Re: set me straight on FED funds rate

The federal funds bracket racket:

The buying and selling of Treasury bills, etc., under the auspices of the Manager of the Open Market Account through the New York Federal Reserve Bank for the accounts of all Federal Reserve Banks are tied to federal funds rates (read repurchase agreement’s rate). As a guide to open market operations the rates are used as follows: a rise in the federal funds rate above the rate triggers open market selling operations. A fall below the rate, open market purchases. Open market operations of the buying type add (free gratis) legal reserves to the banking system; selling operations reduce reserves.
:p:p
The technicians in charge of the hour-to-hour administration of open market operations apparently believe that there is, at any given time, a federal funds rate that is consonant with a proper rate of change in the money supply. They have in fact plugged this concept into a computer model, i.e., (a policy rule; or a "Taylor" like rule).

What they have actually “plugged in” is an open ended device through which the commercial banks can decide whether or not there should be an expansion in the legal lending capacity of the banking system – the capacity to create credit (money) and to acquire additional earning assets.
That this expansion in money and credit will always take place is attested to by the insignificant amount of excess reserves held at all times by the commercial banks. This has assured the bankers that no matter what lines of credit they extend, they can always honor them since the Fed assures the banks access to free legal reserves whenever the banks need to cover their expanding loans – deposits.

A clear distinction should be made between the temporary and the longer term effects of open market operations on the level of interest rates. To hold down the Fed Funds rate (and other rates through this key rate), the Manager of the Open Market Account puts through buy orders for T-Bills or other eligible securities sufficient to yield a net increase in free, commercial bank reserves and free excess reserves. The Fed acquires these earning assets by creating free, new inter-bank demand deposits in the Federal Reserve Banks—that is by creating free gratis, new legal reserves at the disposal of the commercial banks (IBDDs).

Assume the buy order is for T-Bills. The effect is to bid up their prices, reduce their discounts (interest rates) and add to free commercial bank legal and excess reserves. The expansion of free excess reserves increases the quantity of loan able “federal” funds thereby pegging or retarding the increase in the Fed Funds rate but the longer term effects of these operations are to fuel the fires of inflation.

An understanding of these temporary and longer term effects reveals why the tight money policy initiated in February 2006 brought about a continued upsurge in interest rates until 07/20/06 (30 year mortgages).. But it had the longer term effect of bringing inflation and interest rates down, until the end of the FOMC’s tight money policy (at the beginning of the seasonally mal-adjusted time period)...

Spartacus, this answer your questin?


:p>:p>

gold, oil, etc. are rising due to inflation expectations driven by a weak dollar. wsj today has greenspan quoted as saying double digit interest rates will be needed to tame inflation.

"Left alone, he said, the Fed's policy-making body, the Federal Open Market Committee, can keep inflation between 1% and 2%, but that could require forcing interest rates to double-digits, a level "not seen since the days of Paul Volcker," his predecessor as Fed chairman. "I fear that my successors on the FOMC, as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress, if not from the White House," he writes."

what? greenspan a ka-poom believer? ka-poom is about choosing inflation over job losses. here's from ej's vegas presentation last week, slide 30, showing exactly that... double digit rates by 2010 as the fed chases inflation. from the notes...

"1999 Ka-Poom Theory projects a second post-bubble disinflation phase winding down toward the end of 2007.

"After a series of rate cuts and other reflation measures in 2008, the dollar further declines and all-goods inflation rises.

"After that, a long complex series of events occurs… unpredictable as they are largely geopolitical in nature, which brings the dollar down and all-goods inflation up to levels not seen in decades."

so how does all that sit with your sell gold & oil, buy bonds advice?

[Guest]

Re: set me straight on FED funds rate

Metalman -

You wrote: << so how does all that sit with your sell gold & oil, buy bonds advice? >>

I'm really interested in the answer to that too!

However here's a prediction: You are going to get a **very, very comprehensive** answer.

[flow5]

Re: set me straight on FED funds rate

so how does all that sit with your sell gold & oil, buy bonds advice?

I'm myopic. Those are trades that would be lifted in Oct. Then you can reverse your positions, but dump stocks in Jan.

[Guest]

Re: set me straight on FED funds rate

Flow5 is certainly being remarkably succinct here. I cannot fathom Flow5's abrupt change of style! :rolleyes:

Flow5 - what about those seeking inflation hedge positions they won't have to trade for the next five years? Any hope for the non-traders among us here?

[raja]

Re: set me straight on FED funds rate

And considering the stage of the global economy, production & consumption, it's obvious that raw materials are becoming increasingly scarce, and that commodities are rising at increasing rates-of-change. Buy commodities and mining shares, etc.

Earlier this week, I was going buy etfs of uranium, natural gas, food, as well as make some investment in coal (Lukester's suggestion). But I didn't . . . .
My concern is that if stocks crash, everything will go down, including these commodity investments . . . at least for awhile. Any opinions on this possibility??

From the recent update to America's Bubble Economy:

These ripple effects will be strong enough to put the economy into a mild recession. This will collapse the stock market to below 10,000 over the next 18 months to 2 years and real estate prices will fall with it.

So I decided to wait until after the crash to invest in commodities . . . but I'd like to hear other's opinions on this . . . .

Flow5, by which vehicle (stocks, etfs, options, futures) and when are you suggesting that commodities might be a good investment?

[Guest]

Re: set me straight on FED funds rate

Thanks for all your comments Flow5.

Although I've offered up some silly and cheeky comments in your regard, your level of knowledge is probably one of the most comprehensive in this community.

Some of your positions may appear contrary, or even quixotic at times, but I'm betting the great majority of readers here obtain a great deal of hard intel from your prodigious output.

So when I read a terse one line response of yours on occasion I'm liable to fall out of my chair in astonishment. :rolleyes:

[Finster]

Re: set me straight on FED funds rate

What are the mechanics of borrowing at the 3 month T bill rate?

if the 3 month T bill rate is lower than FED Funds, why would anyone borrow from the FED?

Since you can't lend to the FED (I assume you and I can't) at 5% using funds borrowed at the 3 month T bill rate,

therefore it
Seems to me the only way the FED funds rate could have any real effect is when their rate is below free market rates

Otherwise it's just a number with no meaning,

I don't know about you Spart, but I can't borrow at the TBill rate. For that matter, I can't borrow at the fed funds rate either. Each applies to a specific borrower, the former being the US Treasury and the latter being banks ("depository institutions").

You broader point, though has merit. Because different parts of the financial system are in market communication between each other, there is a tendency to arbitrage away any large discrepancies.

[c1ue]

Re: set me straight on FED funds rate

what? greenspan a ka-poom believer?

Metalman,

You're missing that Greenie's got a different job now.

As a professional shill, his previous job was to keep the FIRE expansion going thus benefitting past and future employers.

His job at the immediate time is to sell his new book.

That in doing so he can steer historical opinion of the job he did, just a bonus.