John Berry of Bloomberg Relays the Word from the Eccles Building
John Berry of Bloomberg says what's what about the Federal Reserve:
The amount of cash the Federal Reserve injected into the U.S. banking system on Aug. 9 and 10, and its importance, have been widely misunderstood. Each day banks are open, the people working at the New York Federal Reserve Bank's ninth floor Open Market Desk do the same thing: supply enough money to the U.S. banking system to keep the overnight lending rate close to the Fed's 5.25 percent target. Aug. 9 and 10 were different only in degree, and in the attention the Fed called to the action in a statement issued on the latter day.
There was no hint of an interest rate cut -- nor is there likely to be unless conditions in world financial markets worsen considerably and threaten continued economic growth in the U.S.... The desk added $24 billion on Thursday and $38 billion on Friday. However, just stating those figures tends to exaggerate their importance. For instance, as recently as Aug. 2, $17 billion had been added and everyone yawned. Furthermore, by the end of the yesterday essentially all the additional liquidity injected to calm markets had been withdrawn....
Routinely, a substantial amount of cash is added each Thursday for a 14-day period. Half of last Thursday's injection was of that type. The other $12 billion was left in the banking system just overnight, that is, the New York Fed returned the securities on Friday and took back the cash.... The lending rate jumped around, ranging from zero to just over 6 percent, as the desk found it necessary to step in three times, adding $19 billion at 8:25 a.m., another $16 billion at 10:55 a.m. and finally $3 billion at 1:50 p.m., according to the New York Fed. All that $38 billion was returned to the Fed yesterday.
With markets under far less pressure, that money was replaced by new agreements of just $2 billion, much less than the usual daily total....
On Aug. 10, after the markets closed, Macroeconomic Advisers released its latest economic forecast, one very similar to the collective forecast of Fed officials. The new predictions include gross domestic product expanding at about a 2.5 percent annual rate in the second half of this year, rising to about a 2.75 percent rate early next year.
`Core inflation is projected to remain stable at the upper end of the Fed'scomfort zone' of about 2 percent for core personal consumption expenditure inflation... as well-anchored inflation expectations and a gradually rising unemployment rate offset upward pressure on growth of labor costs,'' the company's explanation of the forecast said....Obviously the rush to shed risky investments triggered by losses in subprime mortgage-backed securities isn't over. Fed officials will be watching what happens next and will respond to disorderly market conditions, with those folks on the Open Market Desk their front-line troops. Bailing out ailing hedge funds or propping up the stock market isn't on their agenda, however.
The fact that Federal Funds opened Friday at 6% when the Fed's target was 5.25% was a shock. On $100M, that overnight interest rate differential amounts to--if I can still do math in my head--$2.1K. So there were people on Wall Street who would rather spend Friday afternoon explaining why they had bought FF at the opening and thrown away $2.1K rather than waiting three hours and running the risk that the market would blow up in the meantime. Of course, it was a small shock: nothing like 1907, when the overnight premium on $100M in reserve cash was $400K. It may be best read as an indication of how placid our times really are--and of how highly leveraged (at least some of) the Wall Street professionals are, that this is big news.
Also worth noting is the absence of significant moves in stocks and safe bonds. The action is all in the return of risk premia and credit spreads from remarkably low to historically normal levels. People who bet that credit spreads would stay tight have lost--some of them big. People who didn't read the fine print have found that some of their hedges have not performed as they expected. People who did read the fine print and bet that credit spreads would widen are going to report very good quarters.
