An Odd Combination of Serenity and Panic
The United States, with untroubled ease, continued its approach toward catastrophe this week. The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement. Yet, on the surface, all still remained in the superlative.
S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]
Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.” As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000. 401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.
Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth. Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.
After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing. Zero Hedge documented the chaos real time.
This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed. Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.
US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]
At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER). In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan. Greater Fed intervention will be needed to keep things in line.
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