- For the FedRes to maintain its Fed funds rate corridor of 0.25% – 0.50%, it appears they need to drain even more liquidity from the market. Of course, less liquidity means the financial markets will go down. The stock market is liquidity driven. If the FedRes chooses to do nothing, the market will take the FedRes’ 0.25% rate hike proclamation as hot air. They will lose credibility.
- Yellen, You Have A Problem: The “Rate Hike Corridor” Just Broke
by Tyler Durden, www.zerohedge.com , 31 Dec 2015
One week before the Fed hiked rates by 25 bps we warned that “nobody knows if the Fed can actually do it“, citing not only our previous post on the topic, explaining the lack of a detailed framework by the Fed on the mechanics of the rate hike, but also a Bloomberg piece in which we noted the broader logistical concern: “with so much cash sloshing around, will Fed officials be able to nudge rates as high as they want? Will the new-fangled tools they’ve created to engineer the move work, or instead sow the kind of confusion that can dent the Fed’s credibility and spur a broader market selloff?”
The good news, at least initially, was that the Fed’s plumbing worked smoothly, and instead of the Fed draining up to the $1 trillion in excess liquidity some such as Citi had predicted, the very first fixed-rate reverse repo operation saw just $105 billion in liquidity soaked up by the Fed from 49 counterparties.
Was there somehow too little excess liquidity, or was there something more structural at hand. It didn’t matter: after all the Federal Funds rates was solidly inbetween the 0.25% floor and 0.50% ceiling set by the Fed’s Reverse Repo and Interest on Overnight Excess Reserves, and there was no reason to worry that the Fed had made a mistake.
However, this changed today when the Fed Funds rate just tumbled to 0.12%, far below the required 0.25% floor set by the Fed, and down 23 bps from the effective 0.35% Fed Funds rate set yesterday, confirming that indeed the rate hike corridor can and has been breached at least once, and just two weeks into the Fed’s rate hike experiment.