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Strategies & Market Trends : ahhaha's ahs
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To: GraceZ who wrote (953)2/1/2001 12:56:56 PM
From: ahhahaRead Replies (2) of 24758
 
That isn't raw money. It's contingent money and has "rawness" up to the extent to which it adds to the effective RP free float. All those FOMC actions will extinguish themselves so that bank reserves are only temporarily puffed up.

The banks aren't fooled. They need permanent money upon which to build the confidence needed to pursue loans. The margins on loans are at historical highs. Either the banks are uncompetitive or they are unconvinced about the stability of the environment around them. This isn't anything new. For the last 5 years there has been a large premium on loans priced at Prime. Of course, who borrows at Prime? There are all kinds of ways to get the rates nearer to the source if you have size and clout.

It is interesting that the market immediately adjusts to the new FED price fix. This implies the market is superfluous, because it's been preempted. The market has no clue where equilibrium lies. However, even though the FOMC is pouring out the RPs, the market won't mark them to the 5 1/2% target. It already is going with a slight premium at 5 9/16. If there is little total demand for reserves, then where is that 1/16 fillip coming from? With the RP floodgating and the assumed loan weakness, there shouldn't be any fillip.

The answer is that the FED never got tight in the first place. Fed funds at 6.5% wasn't tight! If money was tight, why weren't banks borrowing through the window? Because FED was keeping them fat. Free reserves have remained plentiful throughout the last 10 years. The only conclusion is that last year FED was fighting psychology, not reality.
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