The takeaway: Will banks leave more money in their Federal Reserve bank vaults?
Alejandro Riviera is upset today. He needs $200,000 per year in income in order to enjoy retirement with his wife, Anita, and the dog, Puff. Last week, with the two-year rate at 3.99%, Alejandro needed a portfolio of $5,012,531 to generate his $200,000 in income. Today’s fall off in the market sees his two-year yield falling to 3.89%. This means that Alejandro needs a portfolio of $5,141,388 to generate his $200,000. If he cannot find anymore assets under the mattress, he will have to take an income cut.
Like every trading guru on YouTube and every journalist at CNBC or Bloomberg who never worked a real job before getting their MBAs or journalism degrees, he starts to blame Federal Reserve Board chairman Jerome Powell for the meltdown. I can’t jump on that bandwagon.
While I see President Trump having very little impact on the money supply, his preference for a weaker dollar in hopes that lower rates attract investment to American manufacturing may be taking hold on the markets. As I mentioned a post or two ago, the United States appears to desire being the country in which an investor carry trades. This means that Alejandro will come to the U.S., borrow dollars at a relatively lower rate, and convert them into a currency where he can get a higher return. With all the rumble coming out of Europe about boosting their defense spending, the euro, at least in the short term, appears to be the investment bet.
According to Federal Reserve data, the EUR/USD last week was trading around 1.0400. EUR/USD means that one euro cost 1.0400 dollars. Fed data shows the dollar has weakened against the euro where, according to Fed data released today, the EUR/USD is on average trading at 1.0849.
The same shenanigans with the Japanese yen. Last week, the USD/JPY, according to Fed data, was trading on average of 151.00. This meant that the dollar cost approximately 151 yen. Today, according to Fed data, the cost of the dollar, in yen, is around 147.13.
Monetary policy-wise, these movements in foreign exchange and Treasury rates have me thinking that the chances of a reduction in the federal funds rate, the overnight rate at which banks lend each other a portion of the reserves they have in a Federal Reserve bank vault, have increased where we may see a rate cut at next week’s meeting of the Federal Open Market Committee. That meeting is scheduled for 18-19 March 2025.
I have often heard banter from the market gurus that the bond market front runs (leads) the FOMC’s fed funds policy. If we see an increase in the supply of bank reserves held in Federal Reserve bank vaults in addition to stronger demand for the euro versus the US dollar, I expect further reduction in rates. It is too early to tell, but Mr. Trump may have inadvertently found a way to get his lower interest rates (and give Jerome Powell the finger).
What I am waiting for (but not holding my breath for) is for the President to warn the American people of the hard times that may appear over the horizon if demand for the dollar continues to fall. Falling demand for the dollar means layoffs and a reduction in spending. The only way, in my opinion, to increase the demand for the US dollar will be to start selling the world high-quality stuff; to generate yield the old-fashioned way.
In the meantime, Alejandro should hope that he can add liquid assets to his portfolio or else Anita and Puff will be very disappointed.
Alton Drew
10 March 2025
What I read today.
Banks. Europe. Defense. “As Europe makes defense the bloc’s No. 1 priority, it’s bumping up against its own bankers.
Defense industry executives, politicians and senior bankers alike are now calling for an urgent revamp of regulations and internal processes to make it easier for banks to quickly channel funds into arms manufacturers and military contractors.” — MSN.
Banks. Donald Trump. Markets. “If markets believed Donald Trump would pause his disruptive economic plans at the first sight of a growth downturn or a stock market tantrum, they may have to think again. Although Commerce Secretary Howard Lutnick flatly ruled out a recession in an interview on Sunday, the President declined to make a prediction either way and insisted some turbulence was inevitable.” — MSN.
Banks. Trump. Recession. “Share markets in Asia have fallen after a selloff in the US was triggered by President Donald Trump not ruling out the suggestion that his tariffs could trigger a recession in the world’s biggest economy.” — Yahoo! News.
Banks. Markets. Stocks. “Bank stocks were doing even worse than these major benchmarks. And it wasn’t just big banks: Across the financial-services industry, stocks were taking a big hit. To name a few examples, megabank Citigroup (NYSE: C) was down by about 6%; investment banking giant Morgan Stanley (NYSE: MS) was lower by 8%; and online banking disruptor SoFi (NASDAQ: SOFI) plunged by about 12%.” — Yahoo! Finance.
The data.
Administered rates per the Board of Governors of the Federal Reserve System.
Discount Window: 4.50%
Effective Federal Funds Rate: 4.33%
Interest on Reserve Balances: 4.40%
Overnight Reverse Repurchase Facility Rate:4.25%
Reference Rates per the Federal Reserve Bank of New York.
Effective Federal Funds Rate:4.33%
Overnight Bank Funding Rate: 4.33%
Secured Overnight Financing Rate:4.34%
Broad General Collateral Rate:4.33%
Tri-Party General Collateral Rate:4.33%
Foreign exchange rates per the Board of Governors of the Federal Reserve System.
EUR/USD=1.0859
USD/JPY=147.1300
U.S. Treasury rates
2-yr notes: 3.89%
10-yr notes: 4.22%
30-yr bonds: 4.54%
