Discount rate has changed! Up to a 50 bps variance from the Fed Funds rate, so now at .75% No real effect – just makes it more expensive for banks to borrow from the Fed, and not a lot of that is going on.

For the econ geeks out there – you know that the fed can do more than adjust short term rates with the FOMC.  And, with many previous discussions before, they’ve enacted a new tool – interest on reserves.

But in an article on the WSJ over the weekend, another tool was discovered, and I should have thought of – long term rate manipulation.  hmm, go figure.  Well since treasury now owns freddie & fannie, that seems logical to be able to do.  Purchase long term freddie/fannie bonds to manipulate long term rates.

Let’s think about that – yes that would normalize the yield curve a bit.  Yes that would increase liquidity on the market.  But would it really help?  In pushing the long term rates down – the fed’s goal ultimately would be to lower mortgage rates for the consumer.  Supply-side economics to stimulate demand.  I can see how that would work, but would it really work?  

Tell me, who wants to lend right now?  The best borrowers are still continuing to be lined up next to low grade borrowers.  The banks are hoarding cash due to increase loan losses.  More liquidity would just be more cash to hoard.  A good point was brought up to me – if a bank can buy high grade commercial paper yielding 7%+, why lend at 6%?  Residential and commercial loans have become an unwanted asset.  The banking model is developing – no longer is it borrow short to lend long.  It’s borrow short to lend even shorter.  It’s asking the question ‘how much can we ring out for our NIM’ rather than ‘how can we fund this ninja loan.’

Hmm perhaps the government should buy more commercial paper to loosen up that market.  Perhaps we should just let capitalism hobble along without the government’s crutches.  Let live and let go.

It was just announced, almost just in passing, that the rates accrued on excess balances at the federal reserve increased.  Instead of 75 bips below the target rate, it’s 35 bips.

Please – someone – realize that this is a big deal.

Maybe it’s just because I work at a bank.  Yay for us on increase interest, boo for the eventual increase in fed funds effective.