- Plunge In Interbank Lending: The Straw That Broke The Fed’s Back
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?
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.
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.
The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.
* 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.
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.