{"id":30960,"date":"2018-02-13T17:13:24","date_gmt":"2018-02-13T22:13:24","guid":{"rendered":"http:\/\/olduvai.ca\/?p=30960"},"modified":"2018-02-13T17:13:24","modified_gmt":"2018-02-13T22:13:24","slug":"plunge-in-interbank-lending-the-straw-that-broke-the-feds-back","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=30960","title":{"rendered":"Plunge in Interbank Lending: The Straw that Broke the Fed’s Back"},"content":{"rendered":"
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Plunge in Interbank Lending: The Straw that Broke the Fed’s Back<\/a><\/h3>\n<\/div>\n
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Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate.<\/p>\n<\/section>\n<\/div>\n<\/header>\n
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Interbank Lending Long Term<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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The plunge in interbank lending is both sudden and dramatic. What’s going on?<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Fed Tightening Two Ways<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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The short answer is a straw broke the Fed’s back.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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We can see the effect in other charts.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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LIBOR<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Year-Over-Year M2 Growth<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Money supply growth is falling as are excess reserves.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Excess Reserves<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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