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So they made it official yesterday: It’s three hikes in 2018. But as we said in Part 3, if you care one whit about the plot of the dots you do indeed have your eye on the wrong ball.

Nevertheless, to repeat: The Fed’s massive balance sheet expansion under QE destroyed the historical federal funds market long ago. Under present circumstances, “rate” increases are simply an exercise in pleasuring US banks with another IOER windfall on their $2.1 trillion of excess reserves.

To be precise, it amounts to $5 billion per raise (25 bps), meaning that after yesterday’s action to lift the IOER rate to 1.75% the banks will be harvesting money from the Fed at a $37.6 billion annual rate; and when the third increase of 2018 occurs later in the year, the run rate will by $47.2 billion.

Indeed, should the FOMC finally get the rate in its monetary potemkin village to its ultimate target of 3.40%, it would need to pay the banks, in theory, $70 billion per year to do so (actually it will be less once the Fed shrinks its balance sheet and drains off excess reserves as per below).

We won’t bother to say that back in the day banks generally hated Fed rate increases because it meant a “tightening” cycle was underway. That, in turn, would often squeeze their NIMs (net interest margins), and would eventually cause a fall off in loan demand and a shrinkage of their portfolios of earning assets.

To be sure, some coped better than others via superior credit and funding management techniques, but an interest raising cycle did require every bank to work hard to avoid being squeezed on its margins, volume of business, or both.

No more!

In the world of IOER, the banks need to do nothing but stand around and suck their collective thumbs. And, of course, collect another $5 billion for their troubles each time the Fed raises!

So call it what you will. But it’s not normalization, and the fraud of IOER increases has precious little to do with the real tightening crunch and yield shock just around the corner.

In the meanwhile, it’s just possible that one of the euthanized members of the Fed’s oversight committees on Capitol Hill might be finally provoked to ask out loud: Is Uncle Sam really borrowing money to pay the Fed interest on its public debt holdings so that these burdens on future taxpayers can be gifted to Jamie Diamond et. al. today?


That these ritualistic IOER increases are functioning as a great misdirection—whether intentional or not ( we think it is the latter)—-is underscored by the two charts below.

The first shows the difference between a real tightening cycle and the current sham rate increases. Thus, during the last interest rate raising cycle between June 2004 and June 2006,  Greenspan raised rates 17 consecutive times; and it did mean something.

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