There Is No Short Term Money Market

This is an excerpt from the Pro Trader Macroliquidity report. Macroliquidity.

The Fed has “raised interest rates” (wink-wink). Its primary tools in this make believe policy are interest on excess reserves (IOER) and the interest paid on reverse repos (RRP). The new Fed Funs target rate is now 25-50 bp. Fed Funs were reported to be trading at a weighted average rate of 36 bp on December 22.

Of course, there is no actual Fed Funds market. Fed Funds are the money that banks who were short of reserves borrowed from banks which had excess reserves, so that they could meet the minimum reserve requirement. In 2008, the amount of Fed Funds outstanding rose as high as $450 billion. Over the past 7 years, as the Fed pumped $2.6 trillion of excess reserves into the system, virtually no banks have been short of reserves, so the amount of Fed Funds outstanding shrank to $50 billion.

Today there are very few banks which need to borrow reserves to meet their requirement, and those that do are certainly not representative of the market as a whole. These would be banks in distress, or banks who are acting at the behest of the Fed to make it appear that a real market exists. But in reality, banks that need to borrow Fed Funds today are more like people who are so short of cash that they are forced to resort to payday lenders to pay their bills. The Fed Funds rate is therefore the equivalent of the payday lender loan shark rate for banks who are so short of cash, they can’t pay their bills.

In order to make it appear that the it actually has control over short term rates, the Fed has increased IOER by 25 basis points. This increases the subsidy the US taxpayers are paying the big banks from $6.5 billion per year to $13 billion per year. But hey. We don’t mind. It’s for a good cause. And it’s only $40 per American. We’re happy to help out.

Somehow, the Fed expects that by having us pay the banks more income the banks will raise the interest rates that they charge their customers and that this will gradually cause the money markets to tighten. Or to put it differently, that by lowering the banks’ cost of funds, that will somehow make them want to charge even more to lend money to their customers.