April 8. US Gov’t shutdown looms
April 8. This morning silver has risen above $40 and WTI Crude (June) is up 1.10, now over $112 bbl as a US government shutdown looms. ECB raised rates as advertised, 1/4 pt. Japan suffered another smaller (7.1) earthquake; BoJ says economy under “strong downward pressure.” The US curve steepened, with red/gold pack up over 5.5 bps. US considers ground troops in Libya.
–US short rates have plunged, with 3 month bills around 3 bps. The FDIC insurance fee on overnight borrowing is mostly to blame, and I’ve seen several articles explaining that policy actions to drain reserves may send mixed messages. The bigger issue, in my opinion, is that changes in very short rates at these levels really only matter for financial institutions and traders, and perhaps money mkt funds. There is little or no transmission mechanism into the economy, except perhaps to spur paper assets. Restrictions on new mortgages don’t loosen, credit card fees don’t fall, corporate cash balances are such that no marginal borrowing occurs. The older population that has saved sees lower interest income while taxes, fees and uncertainty rise. However, in europe, now that Portugal threw in the towel, focus will shift to Spain where 80% of mortgages float and there’s 20% unemployment. In this case even a small rate hike may have an asymmetric (negative) effect.
