money markets return to normal after a rockier than usual year-end, with repo rates, fails, and treasury volatility falling. meanwhile, the RRP continues its descent to the zero bound
I have a question about the "jaws of the Fed" and how they compete with macroeconomic and fiscal forces. As I understand it, largely from your work (thank you), the Fed uses FIMA, RRP, FRP, etc. to set a lower bound for credit rates, and IORB for the upper bound.
Let us speculate that the Fed will use these facilities to cut rates by 100bp in 2024. On the fiscal side, however, Treasury is issuing literally trillions of dollars to finance public debt and deficits. Once-reliable foreign investors are drying up, and the hedge funds stepping in to soak up T-bills are demanding much higher rates, pushing the 10-year to 5.5%.
What happens to the cost of credit in the crosswinds? Which forces prevail?
SOFR, the new benchmark for pricing most loans, is tied to interest rates, not the 10 year yield, so cutting 100bps would lead to a lower cost of credit. The Fed's actions prevail.
I have a question about the "jaws of the Fed" and how they compete with macroeconomic and fiscal forces. As I understand it, largely from your work (thank you), the Fed uses FIMA, RRP, FRP, etc. to set a lower bound for credit rates, and IORB for the upper bound.
Let us speculate that the Fed will use these facilities to cut rates by 100bp in 2024. On the fiscal side, however, Treasury is issuing literally trillions of dollars to finance public debt and deficits. Once-reliable foreign investors are drying up, and the hedge funds stepping in to soak up T-bills are demanding much higher rates, pushing the 10-year to 5.5%.
What happens to the cost of credit in the crosswinds? Which forces prevail?
SOFR, the new benchmark for pricing most loans, is tied to interest rates, not the 10 year yield, so cutting 100bps would lead to a lower cost of credit. The Fed's actions prevail.