{"id":1349,"date":"2019-09-18T18:01:43","date_gmt":"2019-09-18T18:01:43","guid":{"rendered":"https:\/\/skyeconomynews.com\/?p=1349"},"modified":"2019-09-23T18:03:57","modified_gmt":"2019-09-23T18:03:57","slug":"the-fed-loses-control-of-the-interest-rate","status":"publish","type":"post","link":"https:\/\/skyeconomynews.com\/the-fed-loses-control-of-the-interest-rate\/","title":{"rendered":"The Fed loses control of the interest rate"},"content":{"rendered":"\n

The Fed loses control of the interest rate<\/strong><\/p>\n\n\n\n

As the Federal Reserve was meeting to discuss rate cuts, it\nlost control of the benchmark rate it manages.<\/p>\n\n\n\n

It was a tough week in the finance market overnight, with\ninterest rates temporarily rising to 10% for some transactions on Monday and\nTuesday. The market is the main plumbing of financial markets, where banks that\nneed short-term funds come to finance themselves.<\/p>\n\n\n\n

The sudden rise in interest rates forced the Federal Reserve\nto engage in money market operations aimed at curbing them, and after the\nsecond operation on Wednesday morning appeared to have calmed the market.<\/p>\n\n\n\n

In a rare move, the benchmark federal funds rate rose to\n2.3% on Tuesday, higher than the target range when it cut interest rates at its\nlast meeting in July. The target range is 2% to 2.25% and the funds rate was at\n2.25% on Monday.<\/p>\n\n\n\n

The rate that the Fed watches, the secured overnight funding\nrate, rose 5.25% on Tuesday from 2.43%. This is the average price of $1.2\ntrillion in short-term financing transactions that occurred on Tuesday. This\naffects floating interest rates on about $285 billion outstanding in corporate\nand other loans.<\/p>\n\n\n\n

Fed Chairman Jerome Powell is expected to face questions on\nthe issue when he appears on the press, after 2pm for the central bank. The Fed\nis expected to cut the federal funds target rate by a quarter point to 1.75% to\n2%.<\/p>\n\n\n\n

Wells Fargo, director of price strategy, said that “This\njust doesn\u2019t look good. You set your target. You\u2019re the all-powerful Fed. You\u2019re\nsupposed to control it and you can\u2019t on Fed day. It looks bad. This has been a\ntough run for Powell.”<\/p>\n\n\n\n

Schumacher and other strategists said the Fed’s operations\non Tuesday and Wednesday appeared to have calmed the market for now, but the\nquestion is why interest rate rises occurred in the first place. Strategists\nsay it appears to be the result of a monetary crisis, not right now because of\nthe credit crisis.<\/p>\n\n\n\n

But anxiety, if it persists, could give a fundamental\nproblem to the financial system. Strategists comment on the problem on a number\nof factors including the Fed’s reduction in its balance sheet, which removed\nsome liquidity from the market, as well as changes in rules after the financial\ncrisis, which required banks to retain more capital and reduce their ability to\noffer repo. Repo is an exchange of collateral such as treasury bills in cash.<\/p>\n\n\n\n

On Monday, there was a storm in the market which caused a\nshortage of cash. Companies were seeking dollars for quarterly tax payments,\nand the Treasury also issued a large amount of bills, reducing liquidity. There\nhas also been speculation that the attack on Saudi Aramco, which halted\nproduction by half of the production line, may be driving demand as oil rises\nand fear of conflict in the Middle East.<\/p>\n\n\n\n

The Federal Reserve on Tuesday accepted $75 billion from\n$80.5 billion in bids in overnight repurchase, after accepting $53 billion on\nMonday. The repo rate was set at 2.25% to 2.60% after Tuesday’s run from a\nrange that was even higher at 3%, just before that. This rate on Tuesday\ntemporarily stood at 9%.<\/p>\n\n\n\n

“They\u2019re working on this repo problem,” said Ralph\nAxel, interest rate strategist at Bank of America Merrill Lynch. ” It\u2019s a\nwork in progress. They\u2019re doing very well. They pretty much got it under\ncontrol.”<\/p>\n\n\n\n

The Fed is likely to cut interest rates on excess reserves\nat its meeting on Wednesday, strategists said. This rate is currently at 2.10%,\nand Schumacher said it may be cut by the Federal Reserve to 1.80% on Wednesday.\nThis could help the central bank maintain better control over federal funds.<\/p>\n\n\n\n

“Generally this whole repo spike is declining, too. So\nyou would expect fed funds to probably print a little bit lower tomorrow, but\nit may not be enough to be within the band,\u201d said specialists.<\/p>\n\n\n\n

Drew Matus, chief market strategist at MetLife Investment\nManagement, said Powell’s briefing could be very difficult. He stated that\nPowell will have to answer questions consistently, as repo is not the easiest topic\nfor most people to understand, even for the Fed chairman. It’s really a\nspecialized area on Wall Street. He’ll have to respond in a way that reassures\npeople, which might make it a tough press conference.<\/p>\n\n\n\n

Matus said the pressure of short-term funding may have been\nthe result of a number of events, including tax payment day, but he and others\npointed out that this does not usually happen on tax day. ” The repo\nmarket that we\u2019re thinking of, the pre-crisis repo market of 2008 doesn\u2019t exist\nany more. It\u2019s a different market with different rules for banks and primary\ndealers\u201d.<\/p>\n","protected":false},"excerpt":{"rendered":"

The Fed loses control of the interest rate As the Federal Reserve was meeting to discuss rate cuts, it lost control of the benchmark rate it manages. It was a tough week in the finance […]<\/a><\/p>\n<\/div>","protected":false},"author":1,"featured_media":1350,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2],"tags":[93,90,60,74,66,79,52,77,36,34,94,114,29,48,24,78,54,131,44,91,57,47,102,76,80,119,113,135,23,45,46,104,109,106,115],"_links":{"self":[{"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/posts\/1349"}],"collection":[{"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/comments?post=1349"}],"version-history":[{"count":1,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/posts\/1349\/revisions"}],"predecessor-version":[{"id":1351,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/posts\/1349\/revisions\/1351"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/media\/1350"}],"wp:attachment":[{"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/media?parent=1349"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/categories?post=1349"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/skyeconomynews.com\/wp-json\/wp\/v2\/tags?post=1349"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}