Simon Potter and the Fed’s policy transmission

From a speech by Simon Potter (head of NY Fed’s Mkt Desk) on April 5, 2017:

https://www.newyorkfed.org/newsevents/speeches/2017/pot170405

 

The transmission of monetary policy relies on competition within, and integration across, money markets. The FOMC’s policy target is the federal funds rate, which is a measure of what banks pay to take out unsecured overnight loans from other banks and from government-sponsored entities. However, the Federal Reserve does not transact in the federal funds market, and therefore cannot directly impact the federal funds rate.7Instead, it relies on a predictable relationship between rates in the markets in which it does operate, and rates on federal funds borrowings. 

 

So….the chart below shows this ‘predictable relationship’.  Fed Funds have gone up by 50 since November.  3m Libor has gone up by 27 bps.  The stock market recognizes it:  FINANCIAL CONDITIONS HAVEN’T TIGHTENED AT ALL….happy days!

 

But the Fed absolutely recognizes it as well.  And will likely be forced into responding by turning up the jawbone volume on balance sheet reduction.  Expect a timetable and plan by the June FOMC.

 

Posted on May 9, 2017 at 9:27 am by alexmanzara · Permalink
In: Eurodollar Options

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