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.
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”.
Turning to the discount window and FHLB is a "natural response" for a bank only when it lacks required reserves.
More bank borrowings at these facilities indicates there are at least some banks having an increasing amount of difficulty in meeting their reserve requirements.
Not only does that raise the probability of a general liquidity crisis as interest rates continue to rise, but it magnifies the damage done to the bank when that liquidity crisis does hit.
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.
I haven't exactly been looking globally. Being US-based I have the greatest facility with US statistics. I do follow the macro signals on inflation and economic output globally, but have not yet found the time to become conversant with the sector-specific data outside of the US.
(There's a lot of reading that goes into this Substack!)
I have seen where other commentators such as Quoth The Raven have indicated there are financial instabilities looming abroad as well as here in the US. In particular we have the Bank of England's pension fund bailouts a couple months back when interest rate rises triggered a cascading series of margin calls on their derivative investments, and of course China's economic woes are something everyone is watching these days, it seems.
There is little doubt but that the global economy is spiraling deeper into recession, and some parts (Europe? Russia?) may even be heading into depression territory.
It's a race to the bottom and at this juncture I'm thinking the winner is the one who comes in last.
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”.
Turning to the discount window and FHLB is a "natural response" for a bank only when it lacks required reserves.
More bank borrowings at these facilities indicates there are at least some banks having an increasing amount of difficulty in meeting their reserve requirements.
Not only does that raise the probability of a general liquidity crisis as interest rates continue to rise, but it magnifies the damage done to the bank when that liquidity crisis does hit.
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.
Given the failure of the eCNY in China, I suspect the opportunity for CBDCs is considerably less than many are wont to believe.
I hope you're right, but I think the push is on.
Very much agree. My instincts tell me that this is not just a USA occurrence.
Have you noticed similar signals globally?
I haven't exactly been looking globally. Being US-based I have the greatest facility with US statistics. I do follow the macro signals on inflation and economic output globally, but have not yet found the time to become conversant with the sector-specific data outside of the US.
(There's a lot of reading that goes into this Substack!)
I have seen where other commentators such as Quoth The Raven have indicated there are financial instabilities looming abroad as well as here in the US. In particular we have the Bank of England's pension fund bailouts a couple months back when interest rate rises triggered a cascading series of margin calls on their derivative investments, and of course China's economic woes are something everyone is watching these days, it seems.
There is little doubt but that the global economy is spiraling deeper into recession, and some parts (Europe? Russia?) may even be heading into depression territory.
It's a race to the bottom and at this juncture I'm thinking the winner is the one who comes in last.