It should go without saying that the sector of the US economy most directly impacted by the Federal Reserve’s interest rate machinations is banking and finance. The Federal Reserve notionally sets interest rates and then banks make the loans. Without loans in all their many forms, from regular loans to credit lines to mortgages to corporate debt, modern economies could not function (whether that’s good or bad I leave for the reader to decide). As a result, if the Federal Reserve’s interest rate manipulations hurt banks, we should be concerned.
These are technical details, but all facts matter. Since March of 2020, the required reserve rate is zero for all financial institutions. The issue is mainly cash liquidity (definitely a legitimate concern), not required reserves. Also, the Fed has been working hard for over a decade to remove the “lender of last resort” stigma from the discount window. While not significant in the grand scheme of things, the annual crop lending cycle for most ag banks peaks in August-October, so borrowing data (FHLB and FRB) on the 9/30 Call Reports tends to be higher than in other quarters. I’ve also seen banks with excess capital enter into leverage strategies of matched or mismatched duration over the last four months (funded by wholesale borrowings) to acquire bonds at expected cyclical high yields.
With the Fed pulling $95B per month out of the system, turning to the discount window and FHLB is a natural response for banks. While these funding draws are running parallel with a looming recession, I’m not sure thy say much other than “we need money to replace the Fed’s shrinkage”.
I've said this comment on Gab, but for folks who read Substack:
Unfortunately, with the FedNow program ready to launch in July and a lot of CBDCs being trialed in the US, they are just waiting for the opportunity to bail-in and/or inflation to make living a nightmare.
These are technical details, but all facts matter. Since March of 2020, the required reserve rate is zero for all financial institutions. The issue is mainly cash liquidity (definitely a legitimate concern), not required reserves. Also, the Fed has been working hard for over a decade to remove the “lender of last resort” stigma from the discount window. While not significant in the grand scheme of things, the annual crop lending cycle for most ag banks peaks in August-October, so borrowing data (FHLB and FRB) on the 9/30 Call Reports tends to be higher than in other quarters. I’ve also seen banks with excess capital enter into leverage strategies of matched or mismatched duration over the last four months (funded by wholesale borrowings) to acquire bonds at expected cyclical high yields.
With the Fed pulling $95B per month out of the system, turning to the discount window and FHLB is a natural response for banks. While these funding draws are running parallel with a looming recession, I’m not sure thy say much other than “we need money to replace the Fed’s shrinkage”.
I've said this comment on Gab, but for folks who read Substack:
Unfortunately, with the FedNow program ready to launch in July and a lot of CBDCs being trialed in the US, they are just waiting for the opportunity to bail-in and/or inflation to make living a nightmare.
Very much agree. My instincts tell me that this is not just a USA occurrence.
Have you noticed similar signals globally?