Goldman Sachs Expects "Fed Liftoff" in December

A few excerpts from a research piece by Goldman Sachs chief economist Jan Hatzius, weekly lunch partner of New York Fed president William Dudley

 Q&A on Fed Liftoff 

We still expect a rate hike at the December FOMC meeting. The leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our forecast is similar to theirs. However, we are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment—or in a broad sense, “the data”—will be worse than the FOMC’s (and our) expectations.

...

The low market-implied probability of a December hike of only 30%-40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). ...

Our own view is that it might make sense to start normalizing in December if we were perfectly confident in our baseline forecast for the economy. But uncertainty around that forecast still argues for waiting longer. The main reason is risk management.

(via  Bill McBride)

Alert: FOMC Meets

The Federal Open Market Committee will meet Tuesday and Wednesday.  It is expected the committee will leave rates as they are--expect an announcement Wednesday afternoon.

3 Basis Points Until Serious Inflation?

The effective Federal Funds rate closed at 0.22%, just 3 basis points away from the top of the Fed's target range. Will the Fed raise the target rate or start printing money? Market forces will cause the Fed to act much sooner than they want on this very important question.

Will the Markets Force China's Hand in Halting U.S. Treasury Securities Buying?

It is obvious that there is growing concern among top Chinese officials about the the huge quantity that China holds of U.S. Treasury securities. The reluctance to add more to the position is counter-balanced by the fact that China continues to intervene in currency markets by buying dollars to keep the yuan at a below market rate. They then buy Treasury securities with most of the dollars (Or at least, they have been). But what if the Chinese currency begins to naturally weaken against the dollar? There would be no more need to buy dollars, and thus no dollars with which to purchase additional Treasury securities.

This would not be the first time that market forces take decision making out of the hands of government officials. Indeed, here at EPJ, we continue to highlight the fact that the effective Fed Funds rate is climbing near the top end of the Fed's target range. This will force the Fed to print more money, or raise interest rates much sooner than most anticipate.

What would be behind a market forced move that would halt China's Treasury buying operations? Simple supply and demand.

In their foreign exchange manipulations, the Chinese print yuan to buy dollars. This obviously increases the Chinese money supply. Although Chinese data is notoriously unreliable, indications are that the Chinese money supply may be growing by as much as 25% annualized rate. This is huge money growth that ultimately will weaken the yuan to the extent that there will eventually be natural market forces that start pushing the yuan down against the dollar (Especially, given that Bernanke is in a no money growth, as measured by M2, mode). When this inflection, occurs, and it may not be far away, the Chinese will no longer need to provide artificial support for the dollar. There will be natural strength in the dollar.

Why do I say this inflection may be near?

In March, China recorded its first monthly trade deficit in six years. Most analysts are writing it off as a fluke. It may, however, be a sign that all the yuan floating out there are near a critical mass to the point that the yuan may start weakening on its own. A trade deficit, afterall, means that money was flowing out of the country not into it---this most certainly has a natural downward pressure on the yuan exchange rate.

Am I Now Expecting Inflation to Come Back Sooner?

Bob Murphy emailed me:

Your post on the PPI surprised me. Since I thought as of one month ago you were still sure that we were about to crash because the Fed hasn't printed new money in a long long time, I would have thought if anything today's PPI number would bolster you. And yet you are sounding more like me.

Did something change to alter your perception? I.e. the year/year PPI was just as big last month (or basically the same).

I replied:

Climbing interest rates. Before now it looked to me like we weren't going to see anymore in inflation than the numbers show, but with the uptick in rates, to me it is showing increasing demand for funds. I don't think the funds are there but if the Fed starts to print to keep rates down all hell could break loose.

G.L.S. Shackle once wrote of the stock market as being like a kaleidoscope. The stock market, he said, appears to be going on a very specific type course, but then something happens to disrupt the course  in a manner similar to the way the turn of a child's kaleidoscope changes a picture.

The current, post stage one financial crisis stock market, and economy, offer the possibility of many kaleidoscope type events.

First, we have the rebound in the stock market and economy from the post September 2008 panic Normally, one would think that such a rebound would be over by now. But we had the enormous double digit money printing (M2) between September 2008 and March 2009, followed by very stingy money printing. This adds to the upside of the equation, in the near term, but  then the money printing stinginess is a signal of downside action in gold, the stock market and upside action in the dollar. We have the upside action in the dollar, the beginnings of downside action in the price of gold. Only stock market strength fails, at this point, to complete the scenario. But overall the trends appear somewhat clear and obvious and a downturn in the stock market would complete the scenario. It should be added that this is a  deflationary scenario.

But the kaleidoscope may be turning. The uptick in interest rates, especially the effective Fed Funds rate, adds a new factor to the equation. The entire market is working under the assumption that the Fed won't raise the FFR or the IOER until late this year. But the uptick in the effective FFR signals that the Fed may have to act much sooner. If the effective FFR pierces through the upper target of 0.025%. the Fed will have two choices. 1. Raise the OIER, which would keep the current scenario in tact. Indeed, it would accelerate dollar strength, a declining gold price and a stock market collapse. O,r 2. The Fed could attempt to fight the climb in the effective FFR by adding reserves, which would be a turn of the kaleidoscope towards inflation.

It is my belief that in most cases there is time to react once the die is cast. It takes time for markets to react to changes that will impact a cross spectrum of prices. The Fed adding reserves would be a signal that the Fed has changed course from deflationary to inflationary. It would not be a signal that would be fully understood as to its significance by most market participants. For example, once a Fed adding reserves becomes clear, it would be unlikely that gold would jump by $100 an ounce, but such a jump could be clearly justified. So there will be time to move into inflationary positions, once a Fed stance that way is clear.

So am I expecting accelerated inflation right now? No.

But I realize Bernanke could turn the kaleidoscope soon, so I am beginning to think about what such a turn of the kaleidoscope would mean, and how to position for it.

More Thoughts on the Effective Federal Funds Rate

As I pointed out over the weekend, the effective funds rate has been climbing by roughly one basis point every other day, since the end of February.

This means one of two things is happening:


1. Bankers are beginning to arb the difference between the Fed funds rate and the interest rate on excess reserves (IOER)

2. There is new real demand for Fed funds.

Neither one of these possibilities leads to a particularly pretty picture. In case 1, this means banks are pulling money out of the system. They are borrowing Fed funds and depositing them as excess reserves. This would be an extremely deflationary tight money situation. For the Fed to stop this it would have to lower the IOER, which would move the danger from deflationary to inflationary.

In case 2, the effective Fed Funds rate is climbing because of real new demand. Under this scenario, there is the very real possibility that the funds rate could pierce the high end of the Fed's target of 0.25%. This would most likely force the Fed's hand and cause it to raise the IOER. This could occur a month or so from now, or maybe even sooner--depending at what rate the Fed Funds continues its ascent, if it does.
 
Such a hike would completely destroy the Fed's plan to delay raising rates until the latter part of the second half. It would completely catch the markets off guard and result in a huge sell off (crash?)
 
There is no more important number to watch right now than the effective Fed Funds rate.

Alert: Effective Fed Funds Rate Up

This should be monitored very closely.

The effective Fed Funds rate has been climbing over the last couple of days. The climb has been slight, but it is unusual. The rate had been trading fairly consistently around 0.12%.

On Monday and Tuesday it climbed to 0.14%, yesterday it hit 0.15%. It hasn't been this high since the summer. Again this is a slight climb, but it suggests that a bank, or banks, is getting more aggressive for funds or the Fed is draining funds, or banks are putting less money into the Fed Funds system.

The key rate remains the interest rate on excess reserves (OIER), which is at 0.25%

Bernanke has remarked in testimony that it has been more difficult to control the funds rate, perhaps this has something to do with the clmb. Nevertheless it should be monitored as a kind of a slight outlier activity. It could mean nothing, it could be significant in a way that will reveal itself in days to come.

Bernanke: We Are About to Ditch the Fed Funds Rate as Target

In fascinating prepared testimony written for delivery before the Committee on Financial Services of the U.S. House of Representatives, Federal Reserve Chairman Ben Bernanke has outlined the current Federal Reserve's plan for a continued winding down of its various emergency programs instituted beginning in September, 2008. The actual appearance by Bernanke before the committee was postponed was postponed because of the heavy snow conditions.

Of note:

1. Bernanke is signalling that the Fed may ditch the Fed Funds rate as a target

2. The Fed appears ready to raise the discount rate as a symbolic measure.

3. The Fed is going to wind down its purchases of mortgage backed facilities (Watch those excess reserves shrink!)

4. The Fed since the start of the year has closed out most of its other special credit facilities.

Specifically, Bernanke says with regard to the abandonment of the Fed Funds rate as a target (temporarily, he says)

As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates. No decision has been made on this issue; we will be guided in part by the evolution of the federal funds market as policy accommodation is withdrawn.

I am not sure when Bernanke figured out the Fed Funds rate has become irrelevant, and I am still not sure if he gets exactly why it is irrelevant, but if you are a long time EPJ reader, you knew the Fed Funds were irrelevant in say, October 2008, one month after the Fed started monkeying with interest payments on excess reserves. See my story written on October 7, 2000: Fed Funds Rate Cuts Have Become Irrelevant

That Bernanke is only pointing to the irrelevancy of the Fed Funds rate now brings into focus my continued warning that by Bernanke introducing all these new Fed tools, the danger exists that one of them creates some type of unexpected byproduct that creates major havoc with the monetary system. (File this paragraph under: Bernanke as Mad Scientist)

Bernanke also appears ready to raise the discount rate:

In addition, the Federal Reserve is in the process of normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans to 28 days, from 90 days, and we will consider whether further reductions in the maximum loan maturity are warranted. Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.

Translation: The discount rate hike will be largely cosmetic in nature.

If the market drops on news of the discount rate hike, it's a signal that there are a lot of clueless traders out there.

Those who have been concerned about the huge excess reserves, are going to be in for the biggest surprise. The climb on the monetary base is about to stop and the drain is about to begin. Heree's Bernanke telling us the climb in the monetary base is about to end (My emphasis):

With its conventional policy arsenal exhausted and the economy remaining under severe stress, the Federal Reserve decided to provide additional stimulus through large-scale purchases of federal agency debt and mortgage-backed securities (MBS) that are fully guaranteed by federal agencies. In March 2009, the Federal Reserve expanded its purchases of agency securities and began to purchase longer-term Treasury securities as well. All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. The Federal Reserve's purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks...

Here's how Bernanke plans to drain the funds (my emphasis):

The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates.

One such tool is reverse repurchase agreements (reverse repos), a method that the Federal Reserve has used historically as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. The counterparty's payment to the Federal Reserve has the effect of draining an equal quantity of reserves from the banking system. Recently, by developing the capacity to conduct such transactions in the triparty repo market, the Federal Reserve has enhanced its ability to use reverse repos to absorb very large quantities of reserves. The capability to carry out these transactions with primary dealers, using our holdings of Treasury and agency debt securities, has already been tested and is currently available. To further increase its capacity to drain reserves through reverse repos, the Federal Reserve is also in the process of expanding the set of counterparties with which it can transact and developing the infrastructure necessary to use its MBS holdings as collateral in these transactions.

As a second means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions' reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves. A proposal describing a term deposit facility was recently published in the Federal Register, and we are currently analyzing the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary shortly thereafter. Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

The Federal Reserve also has the option of redeeming or selling securities as a means of applying monetary restraint. A reduction in securities holdings would have the effect of further reducing the quantity of reserves in the banking system as well as reducing the overall size of the Federal Reserve's balance sheet.

The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments....

...to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted.

So there you have, Bernanke's mad tools to drain the system of excess reserves. On the surface, it should work, but the devil is in the details. What kind of surprise kinks will Bernanke's new tools cause? We know of two kinks that have occurred already. When correspondent banks were at first not allowed to earn interest on deposits with banks that were members of the Fed system, they started pulling their funds. The Fed quickly patched this up by allowing the pass through of the interest. Secondly, the new irrelevance of the Fed Funds rate has to be classified as a kink. Bernanke is only discussing now after it was a clear abnormal change to the system in 2008.

Both these kinks, and that's what they were, did not crash the system, but as the mad scientist Bernanke uses even more tools to drain the system, who really knows if there are other more serious kinks out there.

If things go smoothly with the drain, and they very well could, those who have been screaming about the exploding monetary base are going to have egg all over their face. If there is some unknown kink, Bernanke could blow all are bank accounts up.

To date, Bernanke has been able to wind down the credit facilities fairly smoothly:

...to help stabilize financial markets and to mitigate the effects of the crisis on the economy, the Federal Reserve established a number of temporary lending programs. Under nearly all of the programs, only short-term credit, with maturities of 90 days or less, was extended, and under all of the programs credit was overcollateralized or otherwise secured as required by law. The Federal Reserve believes that these programs were effective in supporting the functioning of financial markets and in helping to promote a resumption of economic growth. The Federal Reserve has borne no loss on these operations thus far and anticipates no loss in the future. The exit from these programs is substantially complete: Total credit outstanding under all programs, including the regular discount window, has fallen sharply from a peak of $1-1/2 trillion around year-end 2008 to about $110 billion last week.

This drain, however, was pretty much in line with an expansion of the MBS purchase program. Now the absolute drain begins.

I'd tell you to buy popcorn, but generally the popcorn eating is for when you are watching an out of control car chase on the big screen from a comfortable seat in a movie theatre, not when you are a backseat passenger in the car that is being chased, and backseat passenger in Bernanke's mad money ride is exactly where you are.

An EPJ Reader Writes the Fed

A long-time EPJ reader wrote a top Fed economist and asked:

The traditional Money & Banking texts like Mishkin, etc. explain paying interest on reserves as the "Corridor Approach" where the Fed Funds rate can never really go below the reserve rate and above the discount rate. If this is so, how can the effective FF rate be below both the "target" FF rate AND the rate paid on reserves? Bloomberg has the effective FF rate at .14 while the target is .25. The reserve rate is .25 also. This deviation was even more pronounced a year ago when the FF rate was .06 while the reserve and target FF rates were .25. How can this be? Thank you for your time and Happy Holiday's.

The senior Fed economist replied:

Hi. You are correct that seeing the market interest rate below the rate paid by the Fed on excess reserves is a puzzle, at least from the standpoint of basic economic theory. The answer to this puzzle lies in a couple of institutional details that are missing in the standard theory.

First, the federal funds rate is not a purely inter-bank interest rate, because some of the participants in this market are not banks. In particular, Fannie Mae, Freddie Mac, and the various Federal Home Loan Banks are large lenders in the federal funds market. These institutions hold accounts at the Fed, just like banks do, but they are not eligible to earn interest on the reserves they hold in those accounts. (Congress has authorized the Fed to pay interest to "depository institutions", which does not include these housing-related entities.). As a result, these entities have an incentive to lend at any positive interest rate they can get.

This first fact explains part of the story: why some institutions are willing to lend at rates below 0.25%. But there is another element to the puzzle: if these institutions are lending at, say, 0.14%, there is an arbitrage opportunity. Any bank could borrow at 0.14, hold the money at the Fed and earn 0.25, and earn a pure profit. Competition between banks to borrow should, in principle, drive up the market interest rate until the arbitrage opportunity disappears. Clearly this has not happened.

Another important institutional fact is that fed funds loans are uncollaterlized. There is usually not much risk in lending money overnight, but we have been through some unusual times. Lenders in this market have become extra careful about who they will lend to. Anecdotal evidence suggests that all of the housing-related entities are willing to lend to the same few banks, which limits the possibility for competition to raise market rates. There is also another wrinkle: borrowing in the fed funds market and leaving the money at the Fed increases a bank's leverage. There is no risk in these actions, but a bank might be reluctant to take advantage of the arbitrage opportunity for fear that investors will misinterpret the reason behind the increase in leverage. These reasons have combined to leave the market interest rate around 10 basis points below the rate paid by the Fed.

I hope you find this explanation useful. I should emphasize that all of the comments above are my own views and in no way reflect any official position of the Federal Reserve. For a more official (and quotable) discussion of this issue, I would refer you to the speeches of Chairman Bernanke (all of which are available on the Federal Reserve Board's website). I don't remember the details offhand, but if you look though his speeches and congressional testimony from last summer I am sure you will find mention of exactly this issue.

What NYT and Bill Gross Don't Get

NYT has a piece out on the extremely low interest rates that banks are paying.

They quote Pimco's Bill Gross as saying:

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

What Gross doesn't seem to get is that this is only at the very start of the yield curve. Roughly under 90 days where rates are extremely low AND this is NOT caused by the Fed. The farther you go out on the yield curve, the higher the rates are. The effective Fed Funds rate is 0.12%. This means that the Fed is NOT pushing rates below 0.12%, the market is. It is for all practical purposes an extreme desire to hold cash or near cash pushing very short rates down--not the Fed.

The government is thus not screwing the average investor by keeping short term rates too low. The market desire to hold short-term money is just huge, which is what is pushing the short-end of the yield curve lower.

Indeed, as ZeroHedge points out even the Primary Dealers are holding huge amounts of T-Bills as a proxy for cash:

T-Bill holdings indicate that this security class is still seen as a simple cash replacement. Oddly, the fact that PDs still have such historically high Bill holdings indicates that all is far from clear, at least at seen by the PD community. An odd observation: T-Bills hit a record on June 3, when over $90 billion in Net T-Bills was being held on bank balance sheets. Since then this amount dropped to flat by November and has since surged again.

Thus, it should be clear that the short term rate in and of itself is not the key factor. The banking system's ability to loan money out farther down the yield curve without repercussions of bank runs is the result of the fractional reserve system and the governments willingness to bailout any major banks that experience runs as a result of the crooked system. The Fed could do the same thing if the real short term rate was 10%, if it allowed the banks to borrow at this short-term rate (or lower) and lend out long.

Yes, the tax payer is getting screwed, but there is no special screwing going on. It has been going on since at least the start of the Federal Reserve System.

To misunderstand what is going on here has significant practical implications with regard to interpretation of the current positive yield curve and what it means for trends in the economy. I'll have a major comment on this Monday.

Fed Funds Rate Cuts Have Become Irrelevant

A new litmus test has developed to determine how well economists understand the machinations of Federal Reserve operations.

Any analyst now calling for cuts in the Fed Funds rate, or forecasting further cuts in the rate, will fail the test.

Yesterday, the Fed announced that it will begin to pay interest on depository institutions' required and excess reserve balances.

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 (The Paulson 'Bailout' Plan) accelerated the effective date to October 1, 2008.

The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points.

The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points.

Paying interest on required and excess reserve balances changes the entire role of the Fed Funds rate with regard to Fed monetary policy, as long as real rates are below the rate paid by the Fed on excess reserves.

The Fed generally adds monetary reserves to the system through its open market operations, i.e., the buying of Treasury securities. This, in the past, had a downward impact on the Fed Funds rate, as the new money the Fed adds shows up as reserves at various banks. Thus, in the past, the more new reserves, the more the Fed Funds rate dropped, since the Fed Funds rate is a rate set by the loaning and borrowing of the reserves. With the Fed targeting the Fed Funds rate, most recently at 2%, the Fed was in effect frozen, by its own target, from adding more reserves to the system if the Fed Funds rate was already at 2% , since any additional purchases of Treasury securities would push the Fed Funds rate below the targeted 2% rate.

Recently, given the crisis environment, the Fed has ignored its own publicly stated Fed Funds rate target and added reserves that pushed the Fed Funds rate below 2%. Last week, the Fed Funds rate traded at 1.56%, 2.03%, 1.15%, 0.67%, 1.10%, respectively from the period September 29 to October 3. This is unusual. The Fed generally stays at its target. So under the old rules, if the Fed wanted to add reserves, it would more than likely cut the target Fed Funds rate below 2%, to keep the target in line with its actual operations. Now, however, with the Fed paying interest on its reserves at a rate near the target Fed Funds rate, the Fed can add any amount of reserves it wants and the Fed Funds rate won't go down, because the Fed is, in effect, simultaneously providing a floor to the Fed Funds rate at the near target rate, or at least the target rate for the excess reserves, since a bank will not withdraw reserves when the Fed will pay it for the reserves.

In summary, in the past, a cut in the Fed Funds rate was required to increase Fed open market operations to add reserves. This is no longer the case, now that the Fed will support the Fed Funds rate by paying interest on required and execess reserves AND it is has always been the actual adding of reserves, rather than the cut in rates that has fueled the economic boom times with the new money flowing into the economy.

Further, because the Fed has put in a spread of 75 basis points between what it will pay on required reserves versus what it will pay on excess reserves, there is increased incentive for banks to put the money to work and get it in the higher paying required reserve column versus the excess reserve column.

The Fed may cut the funds rate in the future for cosmetic reasons to calm the markets, but it is not necessary for the Fed to do so, given that it is now paying interest on reserves at above market rates.

Thus, any analyst calling for a Fed rate cut doesn't understand how the Fed works and the impact the new rule changes will have.