Jerome Powell, the Chair of the Federal Reserve held a live conference on Wednesday, June 16th. We are here to try and understand what in the actual fuck he said.
On average, the Federal Open Market Committee (FOMC for short) meets eight times a year, or roughly once every six weeks, but can meet more often if needed. These post-meeting live events are crucial to understanding the state of our economy, and because of that, they go far out of their way to use rhetoric that is intentionally misleading, hard to understand, and in many cases, outright lies. In these blogs, we will seek to understand and explain these events in plain English.
“Today, the Federal Open Market Committee kept interest rates near zero and maintained our asset purchases”.
When the Fed discusses raising or lowering interest rates, you would not be alone if you thought that it meant the interest rates on your mortgage, or possibly your credit card, though that is not the rate they are discussing. They are talking about the Federal Funds Rate. But what is it?
The Federal Funds Rate is the interest rate banks charge each other to borrow money overnight. It’s that simple, banks borrowing money for the night. Why do they need to do that? All banks must meet a Reserve Requirement, each day. The Reserve Requirement is a percentage (let’s say 10%) of the bank’s deposits. For example, if the bank takes $5,000,000 in deposits, it needs to have $500,000 of cash on hand. If the bank holds that amount, it is allowed to loan out the remaining $4,500,000. To repeat, the Reserve Requirement is simply a percentage of the bank’s deposits, and it can loan out everything else. In many cases, banks need to borrow money to meet their Reserve Requirement, in which they pay the Federal Funds Rate on that loan.
The other option for borrowing in order for a bank to meet the Reserve Requirement is to borrow directly from the Federal Reserve’s Discount Window. This is just a lending portal from the Federal Reserve. The options include Primary Credit, Secondary Credit, and Seasonal Credit, depending on how much they like you. Throw in the Federal Funds Rate and you’ll see all of these interest rates on their site.
But, wait. You said that the interest rate for the Federal Funds Rate was 10%?
No. I said, “let’s say 10%”, so we could explain how it should work. March of 2020, the Fed lowered it to 0-0.25%. If you quick math that one, you’ll find that banks are borrowing money from each other for free! But at least they have the Reserve Requirement which makes them keep some cash on hand, and we aren’t just endlessly doling out as much cash as they want for free, right? Wrong.
That’s taken directly from their website, go check. In fact, here’s a link.
Quick Recap. The banks endlessly borrow from one another, or the Fed, basically for free, and have absolutely no requirements for actual cash they need to have. What happens if the Federal Funds Rate goes up?
Rates go up across the board. Mortgages (that aren’t already fixed), credit cards, loans of any kind. If it has an interest rate, it will be affected, short-term loans get hit the worst, and of course, the Federal Funds Rates drives the Prime Rate, otherwise known as the rate, all the people with the best credit get. If rates go up, fewer people borrow, if fewer people borrow, there’s less money in the system, and then we also have Reverse Repos. This is how the money is borrowed overnight, as when the money is borrowed, it has to be paid back. If the rates go up, the rate at which the money borrowed thus far, and money continually borrowed will have to be paid back, and Reverse Repos are the highest they have ever been. Here’s a Reuters article from yesterday (June 17th, 2021), stating that the Fed accepted an overnight Reverse Repo of $755.8 BILLION.
That’s just the Fed, and that’s just one night. That doesn’t include borrowing from one bank to another.
So, recap. Banks are endless borrowing for free from each other and the Fed for virtually nothing at the highest rate the world has ever seen, and the expected Reverse Repo rates will top $1 TRILLION! Where is all of this money coming from?
Credit. Debt. The click of a button. Here is a link where the Fed explains they can print money whenever they want for nothing. This is where the “maintained our asset purchases” come into play. They are using funds that do not exist to purchase securities nobody wants to keep the market “liquid” when the liquidity doesn’t actually exist.
· $80 Billion Per Month in Treasury Securities
· $40 Billion Per Month in MBS (Mortgage-Backed Securities)
“The housing sector is strong, and business investment is increasing at a solid pace. In some industries, near term supply constraints are restraining activity”.
Houses have a high demand currently because people can see the impending economical fallout coming from frivolously printing money that doesn’t exist causing the United States Dollar to lose more value every day, and people are desperate to put their wealth into assets, and out of the dollar. The “supply constraints” are two things. One, inflation is making everything too expensive, and companies cannot create the output they desperately need. Two, people have taken an exit from the traditional workforce in lieu of state-backed support and remote work accessibility. People are starting to realize they can work from home for a better wage, and they are tired of being taken advantage of.
“Inflation has increased notably in recent months. The 12-month change in PCE prices was 3.6 percent in April and will likely remain elevated in coming months before moderating.”
Personal Consumption Expenditures (PCE), is basically equivalent to Consumer Price Index (CPI, the things you normally have to buy). Inflation went up, and suddenly the tank of gas that once cost me $32, now costs me $42. Looks like more than a 3.6% increase, right? Right. Go back two meetings ago and Powell wasn’t even admitting that inflation was happening, and now he is underselling it and warning that it will probably get worse. Next year the expected rate is 2.1%, and then 2.2% the following year.
Inflation, as mentioned in the article I linked above, is theft. That is the Federal Reserve willfully printing more dollars out of nothing but the click of a button, and the money never truly exists. When you increase supply, demand goes down. Simple economics. They are telling you, down to their expected percentages, how much value your money will lose over the course of the next few years, and we are expected to be alright with it.
The Federal Reserve and the United States Government decided to debase the value of your time. Every moment you spent working, away from home, they took it upon themselves to tell you it wasn’t worth that much.
When someone on the street prints (counterfeits) money, it’s a crime, when the Federal Reserve backed by the U.S Government does it, it’s called inflation. The United States is in a dangerous experiment involving debt, credit, and most of all, theft. The world watches.
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