Fundamental, Not Technical

On June 13, the day the eurodollar futures curve inverted, Federal Reserve Chairman Jerome Powell was at his regularly scheduled press conference following the regularly scheduled FOMC meeting. Nobody asked him about eurodollar futures, of course, because why bring that up? The press did inquire about IOER, though. The Fed had decided to make a “technical adjustment” in its policy for ostensibly controlling money market rates.

The tortured history of IOER wasn’t reviewed. Instead, the Chairman deferred to some procedural issues in federal funds. At least that is what he called them. Sticking to the T-bill deluge lie, the Fed, Powell noted, would adjust IOER by 5 bps the next day.

Ever since the debacle of 2008, the technical framework for monetary policy has been different – though not necessarily for the reasons you might imagine. It remains one of the more unexamined aspects of the global monetary breakdown, this full-blown rebellion in federal funds.

For a good long while at the worst possible times, the federal funds rate was untamable. Nothing the Fed did including the introduction of IOER made any difference. This was no minor deviation, though very few know anything about this part of the affair. It goes straight to the fundamental properties of the modern money system every central bank gets wrong – which is why it was the central basis for my speech in Toronto on August 10 (I’ll post the video for it soon).

This breakdown in predictable hierarchy describes very well what’s wrong with the global monetary system. That, obviously, isn’t the judgment of central bankers like Jerome Powell, therefore “technical adjustments.”

The immediate 2018 problem is that the effective federal funds (EFF) rate is getting too close to the top. Rather than a single federal funds target as had existed from the 1980’s until 2008, the FOMC now sets an acceptable range. To enforce the limits of that range, the reverse repo rate is positioned at the bottom (which hasn’t really held up either, though not in direct relation to federal funds) and IOER on top despite its uniformly awful past performance.