Alan's Alert 6-18-2021

 

It feels like the wheels are getting a little loose.  The Fed meets, raises the rate on their reverse repo function and what happens?  We have a record in the use of the facility.

NY Fed President John Williams assured investors weeks ago that the repo facility was functioning as it was supposed to.  This was reiterated by Jerome Powell at the press conference on Wednesday.  He said that the reverse repo facility “which is to provide a floor under money-market rates and keep the federal-funds rate well within its – well within its range. So, we’re not concerned”.

 

I know that this is not an easy concept to understand.  Wall street likes to make things sound as complicated as possible so that you’ll give up trying to understand them.  The less transparent and more complicated, the more money wall street firms can make.

 

What has happened is the Fed has stuffed the banks full of cash.  They were concerned that the government shutdowns would create a crisis.  When all you have is a hammer, every problem looks like a nail.  The Fed’s hammer is to create money and push it to the big banks.  Total reserves of financial institutions have skyrocketed.

Now the banks are pushing it back to the Fed.  Banks get interest on the reserves they hold at the Fed.  While the banks and the Fed would rather find a customer to lend these funds to, the market for commercial and industrial loans is running dry.

To recap; the Fed created massive new money and shoved it into the banking system because they were nervous about a market crash due to the government shutting down the economy.  The banks couldn’t find anyone to lend the money to so they are pushing it back to the Fed.  Its like a game of hot potato.

So, where do we go from here?  The Fed has created enough money to make inflation explode.  The government gave some of that money directly to consumers in the form of relief payments.  Some made it into the system through the PPP loans to businesses.  Due to the shutdowns, many businesses have collapsed.  Banks are having a hard time finding customers to lend money to, so they are doing what they can to earn a return.  Things are looking downright frothy.  We seem to be in slow boil mode.  I’m patiently waiting for a catalyst to set inflation to warp drive.  What would the catalyst look like?  There are many but a few of the big ones would be; bank lending picking up, wage rates running high, or a change in consumer sentiment. 

The Fed updates the M2 money supply next week.  This will be an important indicator to determine if the Fed will slow down the printing presses.