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mortiz

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Reply with quote  #1 

Conventional wisdom is the Fed will raise the Federal Funds rate to 5.25% on Thursday (6-29-06) and as usual, most importantly in the eyes of most analysts, the content of their comments for the future.

 

However, there has been some uncharacteristic behavior in the overnight Fed lending desk with respect to the "effective rate", or the rate the Fed actually charges its member banks for daily reserve adjustments.

 

In the past, the Fed has loudly telegraphed its intent to raise rates prior to their scheduled meetings by hiking the overnight effective rate to a premium over the target rate several days prior to the rate increase announcement. The effective rate premium over the target rate has often nearly matched the rate hikes prior to many of the Fed meetings.

 

Below is a table illustrating the nightly effective rate, the target rate, and premium or discount of effective rate relative to the target for several days prior to the scheduled meetings over the past year or so. Accounting ledger formatting is used in the table, thus an effective rate premium over the target is designated by a black font while an effective rate discount relative to the target rate is in parentheses with a red font, i.e. (0.xx).

 

Note the magnitude of the premiums leading into the Fed meetings over the past year or so.  In the ten days prior to the Fed meetings, there are very few "red discount" entries and usually, the premiums are close to, or above, double digit basis points.

 

Take a look at the current action in the effective rate to target rate discounts and premiums in the lower right hand corner of the table.  The past couple of days, there have been nominal premiums, well within the normal range one would observe under normal conditions when pending Fed meeting are weeks away. Note also the string of discounts over the past couple of weeks, quite uncharacteristic for days leading up to Fed meeting over the past year.

 

 

Tonight's (Wednesday 6-28-06) effective rate could result in a more normal premium one would expect going into Fed rate hike announcement day, but I find the recent tendency of the Fed overnight desk to keep the effective rate under or nominally over the target rate very unusual.

 

Perhaps the Fed's motivation over the past several days in keeping the effective rate is an attempt to increase available liquidity to the volatile markets..... or is there a surprise in store for Thursday?

 

In the fullness of time....

 

FWIW

 

Randy

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fib_1618

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Reply with quote  #2 
Quote:
Tonight's (Wednesday 6-28-06) effective rate could result in a more normal premium one would expect going into Fed rate hike announcement day, but I find the recent tendency of the Fed overnight desk to keep the effective rate under or nominally over the target rate very unusual.

I'll say. Also note that there were double digit premiums going into each prior announcement, but not this time around.

The internals are also suggesting bottoming action now with yesterdays sell off, so the specialists might had been taking the market lower to accumulate stock on the idea that there might not be a rate increase using this same data as a guide.

Thanks for bringing this to our attention Randy, and please let us know how today's effective rate comes in...if it's not double digit, I think we might be able to trade on this fundamental knowledge (gasp!) very successfully.

Fib


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doc

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Reply with quote  #3 

Randy,

 

Between your day job and all the market research you do, do you ever get time to sleep? This data is much appreciated. Let's see how it unfolds.

 

Doc

 

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mortiz

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Reply with quote  #4 

The Fed effective rate came in at 5.06% for Wednesday evening, 6-28-06, a six basis point premium over the target rate. 

 

Although the effective rate premium/discount trend in the week or two prior to this Fed announcement is by far the closest to target since the Fed began its rate hike campaign in June 2004, Wednesday's six basis point premium was the highest premium since the Bernanke raised the target rate to 5% in May. However, a six basis point effective rate premium is far from excessive

 

So, perhaps the Fed is being less blatant this time around in telegraphing a hike.

 

There was an interesting shift in a couple of Rydex funds yesterday, nearly $70M came out of the Rydex Ursa bear fund, and has the fingerprints of a single investor who shifted a like amount into the Ursa fund in early June. About $60M went into the Rydex short bond fund (Juno) on Wednesday as well... same trader? 

 

There are some larger Rydex traders who are not exactly savvy timers, and it's difficult to detect if the Wednesday shift from short the SPX to short bonds was one particular poor timer or not, but somebody is apparently betting $60M to $70M stocks are going up and bonds are going down in the short term.

 

As far as the Fed action over the past week or two, my apologies to the technical purists for polluting the main board with fundy-type data points, but I thought it may be of interest the unusual behavior of the Fed going into this June's meeting.  In the past two years of rate hikes, the effective rate has always openly telegraphed the hike, this month the effective rate clues are far more subtle if the intent is raise rates once again.

 

FWIW

 

Randy

 

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dstuart

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Reply with quote  #5 

You need never to apologize for anything you write on this board as far as I am concerned. Keep up the great work!!

 

Dennis

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jmicou

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Reply with quote  #6 
Thanks for taking time to share the fed fund rate data and hope you make a habit of it.

Interesting note about Rydex.

regards,

Johnny

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doc

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Reply with quote  #7 

Thanks Randy.

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fib_1618

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Reply with quote  #8 
Quote:

As far as the Fed action over the past week or two, my apologies to the technical purists for polluting the main board with fundy-type data points, but I thought it may be of interest the unusual behavior of the Fed going into this June's meeting. In the past two years of rate hikes, the effective rate has always openly telegraphed the hike, this month the effective rate clues are far more subtle if the intent is raise rates once again.

Fundamentals, as it relates to monetary policy and the liquidity needed for expansion, is what we attempt to forecast here everyday, so no apologies are necessary. In fact, information like this will hopefully give us a pretty good idea of how the new regime will act and react to the various amount of stimulus that this same monetary liquidity produces, and then as it's adjusted (or manipulated) for further forecasting merit.


It's always good to remember that the advantage of being a technician is that we "cheat" the great majority of traders as to what the future fundamentals will look like by watching how money flow discounts this same future.


It's also good to remember that there are times in which the economists that do determine this same monetary policy platform can have an immediate reaction on the direction of price movement as well. All we have to do is look at the May meeting to make this observation all too clear.


Thanks for the follow up Randy...with the lack of double digit premium going into today's announcement, it would suggest to me that a 1/4% is in the cards for today (just to make everyone happy), but because of the lack of premium "squeeze" this time around, a look and see stance will probably be seen as early as the August policy meeting.


Fib


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"As for it being different this time, it is different every time. The question is in what way, and to what extent" - Tom McClellan

"An economist is someone who sees something happen, and then wonders if it would work in theory" - Ronald Reagan

"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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doc

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Reply with quote  #9 

Randy, the Fed effective rate came in at 5.27% for Thursday, 8-03-06, a two basis point premium over the target rate. The average of the last 3 days is < 1 bp above the target. Based on the historical data you've presented, it looks to me like the odds highly favor a pause or at most the usual 25 bps. 

 

Doc

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mortiz

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Reply with quote  #10 

Doc,

 

Over the past ten days, the average effective rate premium over the discount rate has been virtually zero.  Unless large premiums surfaced Friday, and again Monday, the past two ten-day time frames leading up to the Fed meeting have not resulted in the blatant telegraphing of the hike by the Fed.

 

Greenspan's overnight lending desk would always raise the effective rate significantly in the days prior to the announcement;  Bernanke stuck with that tendency for his first two hikes, but did not telegraph the hike via overnight effective rate action in late June, and is repeating the June behavior again this time. 

 

Perhaps Bernanke is marking his new territory by being far more coy than his predecessor with respect to "announcing the hike" prior to the announcement.  The Fed Fund futures action is suggesting a low probability for a rate hike this time around, so there may actually be some suspense leading into the Fed meeting.

 

FWIW

 

Randy

 

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