Saturday , July 24 2021
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Fed Rate Cut

Summary:
Looks like they are going to have to cut the IOR:Current factors are at .2T in latest H.4.1 and their b/mo. UST buying policy has rates plummeting to where the 3 year UST is currently yielding only 0.85%.So if they were to roll the whole portfolio into this 3 year duration of USTs  (which is their current policy goal) now at 0.85% that would yield about B annual...IOR right now is at 1.6% on the .7T (and rising...) of Reserves at Depositories so that creates a liability for them of B so that would only leave an excess of B for them to have to run the FRS and have any to return to the Treasury account...  and this is TOO SMALL imo...They are going to have to cut the IOR liability or risk the continuation of the bond rally they are fomenting to leave them "out of money!"...

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Looks like they are going to have to cut the IOR:

Current factors are at $4.2T in latest H.4.1 and their $80b/mo. UST buying policy has rates plummeting to where the 3 year UST is currently yielding only 0.85%.

So if they were to roll the whole portfolio into this 3 year duration of USTs  (which is their current policy goal) now at 0.85% that would yield about $35B annual...

IOR right now is at 1.6% on the $1.7T (and rising...) of Reserves at Depositories so that creates a liability for them of $27B so that would only leave an excess of $8B for them to have to run the FRS and have any to return to the Treasury account...  and this is TOO SMALL imo...

They are going to have to cut the IOR liability or risk the continuation of the bond rally they are fomenting to leave them "out of money!"...  which they are never going to let happen in a million years...

or perhaps they are ignorant of any of this and will let themselves "run out of money!"... who knows...  they let their own system run out of minimum Reserve Assets in September... I guess you never know without being able to debrief these people...

This hypo cut in the risk free rate would help stabilize risk asset prices ... which are in free fall this month with the Fed adding 10s of $Bs of Reserve Assets to Depositories while holding the risk free IOR rate constant...

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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