19 Jun I WILL ARGUE THE FED WILL CHANGE MONETARY POLICY TODAY JUST AS THEY DID IN MAY
Will there be a change in monetary policy announced today at the conclusion of the FOMC meeting? At the end of May’s meeting the Committee lowered the interest rate the Fed pays on excess bank reserves for the yield was higher than that of the one year Treasury.
Because of the unrelenting rally in the bond market, the imbalance is still present today, an imbalance that discourages bank lending. According to the WSJ, the Fed now pays 0.35% higher on excess bank reserves than the one year Treasury yield and 0.25% higher than 10-year Treasuries.
The rhetorical question to ask is why would banks engage in any risked based lending when the government is paying banks a risk free interest rate greater than a risked based interest rate? This differential has caused banks to increase excess reserves by 5.5% or $65 billion over the past month according to the Journal.
Last November the 10-year was yield 3.24%. Today the yield is 2.03%. Six months ago the median estimate for the 10-year was 3.33% and not one of the over 50 Blue Chip economists surveyed thought the yield would fall below 2.40%.
Lending was then accelerating as excess reserves were declining, a decline of about $467 billion. Growth was regarded as robust.
I must write it can be argued the fed funds rate is now a paper monetary tiger given that this overnight market has contracted by 80% since 2008 for a myriad of reasons including the fact the Fed bought or offset 45% of all federal debt issued during the Obama era.
I ask will the market/media acknowledge the above that in many regards the fed funds rate is not as remotely as significant as the interest rate the fed pays on excess reserves? Probably not. The media will be hyped up about some company trading at 45x expected 2038 revenues pounding the table how it is an explosive growth concern.
What will happen today? Yesterday equities were encouraged by a Trump tweet of a possible meeting with China at next week‘s G-20 meeting. Stocks were also encouraged by dovish statements from the ECB.
Last night the foreign markets were up. London was down 0.22%, Paris up 0.05% and Frankfurt up 0.05%. China was up 0.96%, Japan up 1.72% and Hang Sang up 2.56%.
The Dow should open flat awaiting the outcome of the Fed meeting. The 10-year is off 7/32 to yield 2.09%.