Plunge In Interbank Lending: The Straw That Broke The Fed’s Back
- Plunge In Interbank Lending: The Straw That Broke The Fed’s Back
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Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate. The plunge in interbank lending is both sudden and dramatic. What’s going on?
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Fed Tightening Two Ways
The short answer is a straw broke the Fed’s back.
A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.
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Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it. We can see the effect in other charts.
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The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.
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* The treasury unwind started at $6 billion per month, increasing by $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
* The mortgage debt unwind started at $4 billion per month, increasing in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
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Does the Fed Know What It’s Doing?
Janet Yellen answered that question directly in her speech A Challenging Decade and a Question for the Future, at the Herbert Stein Memorial Lecture National Economists Club on October 20, 2017.
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