Danny Salas

Archive for February 10th, 2010

Chico, CA Interest Rates Market Report – Economic Influences – February 10, 2010

All In All It's Just A...'Nother Writing On The Wall...

Dangerous Territory

We have passed through and, currently remain under, the 200, 100, 50, 40, and 25-Day Moving Averages.  Well, that pretty much tells me to lock.  Like water through a block of swiss cheese, rates have moved below all of these layers of support.  Now, we could bounce back over the 200-Day and 40-Day Trend Lines of support.  However, there doesn’t seem to be much information, in the markets, the can support movement over the other three Trend Lines, that have become Lines of Resistance.

More Writing On The Wall

I’ve mentioned the “writing on the wall,” regarding rates increasing.  Yesterday, St. Louis Fed President James Bullard said, inflation concerns “have crept up a little bit, over the past year.  I think the risks…are shifting, now, toward the upside in the medium term, where you might get more inflation, in the medium term if you don’t manage your affairs properly.”  Now, this statement is from a voting member of the Federal Open Market Committee (FOMC).  He’s more prone to believe that the “low rates for an extended period” language, should be removed from the comments of the FOMC meeting’s Policy Statement.

Good ‘Ole Ben Bernanke

Big Ben, as he’s otherwise known as, is speaking to the House Financial Service Committee.  It was delayed due to the weather, back east, however, the information and minutes from the Policy Statement are being absorbed by the market, as I write.  Ben, actually, continued to mention, “an extended period,” however has not presented a time-line or strategy regarding how we’re going to get away from our current accommodating policy.  The Fed tried to calm investors’ concerns by mentioning that that could always sell their Mortgage-Backed Security Holdings.  But, indicated that they’re not, presently, interested in doing that.  And, when they did, it would be gradual.

Spread Between Government Rates Increasing

Good ‘Ole Ben Bernanke mentioned that the Fed Funds Rate, and the Discount Rate, will probably see a widening of their values. Particularly, the Discount Rate, rising back to .75%  How does this effect rates?  Well, in our current environment, it shouldn’t.  Here’s why:  After the Mortgage Credit Crisis, the Fed announced that they were discounting the discount rate, from .75% to .25%, to enable banks to borrow money at lower levels, to keep the industry afloat.  The problem was that the industry (or banks) had to pay back the loans, in 28 days.  So, banks couldn’t borrow.  So, the next step was to increase the 28 day pay-back period, to 90 days.  This helped, but banks funding abilities, seem to have leveled off, and therefore, the increase in the discount rate, to .75% shouldn’t effect the industry negatively.

Interest Paid On Excess Reserves

The New Benchmark Rate, so to speak.  Now, this is huge.  No longer will the Fed be focusing so intently on the Fed Funds Rate.  They’re pullin’ the ‘ole switch-a-roo on us.  Here’s the deal:  Banks are required to keep a certain amount of funds, on reserve, with the Federal Reserve.  Occasionally, these reserves are higher than the requirements.  Currently, the Fed pays no interest on those extra reserves.  So, banks look to get their money out of the Fed, as soon as possible, so as to at least make something on their money.  So, if banks are constantly lending out their reserves, even just overnight, for something, the Fed needs to offer more of an incentive for banks to keep their money with the Fed, giving them more of an ability to determine and measure a benchmark interest rate.  So, the Fed would set a target interest rate, just below the Fed Funds Rate, so that the excess funds would make something, yet Banks would keep those funds with the Fed.  So any way you may interpret this, a “new” Benchmark Rate, or a new way to make certain that the Fed Funds Rate is more secure with banks, it’s simply preparing the market for higher interest rates…and the Fed will be ready.

Locking Advice

There’s nowhere to go, but up, from here.  It’s time to focus on reality.

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Another Reason Rates Are Going Up

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