Powell to Sunset the Federal Funds Rate | QPOL Issue #6
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Happy Phresh Phil Phriday! As I dive further down the rabbit hole of the Luongon thesis, I came across a theory of my own that I believe changes the game entirely. An an additional nuclear option would further validate that the Fed and Powell’s goal is to completely gain back the Fed’s monetary independence from the colonial commies out of Europe (Davos) and re-establish its credibility as a steward of American capital. As I covered last week, one move Powell may very-well make is ending the Fed Put, but it doesn’t stop there. I believe that Powell is sun setting the Federal Funds Rate…
As the Fed continues interest rate hikes that will surely break Europe and destroy the offshore dollar market, Jerome Powell may also sunset the Fed Funds Rate and completely replace it with the Secured Overnight Financing Rate. Again, the Fed’s goal is to re-assert its credibility and gain back monetary independence, markets be damned. The Fed Put is very much a globalist idea and unlike Bernanke and Yellen before him, Powell is no academic globalist. His incentives are aligned with his shareholders, the commercial banks. So with all this in mind, why not end FFR all together if the Fed has already implemented SOFR?
For a brief review on SOFR, as of January 2022, all newly issued US domestic debt is re-indexed from LIBOR (London Interbank Overnight Rate) to SOFR (Secure Overnight Funding Rate). Previously, all US debt was indexed to LIBOR, a rate that is established by 18 panel banks at the City of London (only 1 of which represented the interests of America, the J.P. Morgan office in London). SOFR in contrast, is indexed to actual/real market activity between financial institutions in the US. It’s based on something real as opposed to an arbitrary number dictated by the European banks. This reindexing to SOFR removed US exposure to Eurobank balance sheets because as LIBOR rates blow out, the US is not affected. Americans would no longer see the hurt via increased rates on their credit cards, mortgages, etc. Under SOFR, US rates no longer have to increase for Americans in order to socialize the losses in Europe.
If the Fed trusts the “market rate” between US banks that is further establishing credibility of the US and Fed and it’s helping bring capital to America, then what is the point of the FOMC coming out to save the day with a separate rate (FFR) if SOFR is taking care of it all and if everything is going great? Powell wouldn't be in as big of a pickle. Therefore, I believe having SOFR replace FFR would be one of the final nails in the coffin to give the Fed it’s monetary independence. If the Fed wants its credibility back and is even considering ending the Fed put, what's the point of the central planning of FFR from there? Would this not be in-line with the legacy Powell wants to leave? He retired the term “transitory inflation”, why not retire the Fed Funds Rate?
Is (was) LIBOR not the FFR for over seas (AKA the offshore/Eurodollar market)? Yes. LIBOR is the rate the Eurodollar System/Offshore Dollar Market (ODM) is indexed to, and is the cancer against the Fed by undermining its credibility through the ability to “print” more dollars than the Fed itself. Remember, these tightening policies under Powell and the banks are enabling Powell to destroy the ODM. That’s the unspoken MO. Thankfully in this rag, we say the QUIET PARTS OUT LOUD!!!
The new benchmark rate would be determined by the 12 regional banks, which is what SOFR is. Therefore, 86 (end) the Fed Funds Rate for complete US monetary independence. Additionally, Isn't every other country in the world indexing their new secured rates to SOFR? Is that not what KOFR is? So if that’s the case, the new system is already being stealthily implemented, just as Powell has been stealth tightening since last June when he raised RRP by 5 bips.
Martin Armstrong always laments that when the Fed was being constructed, the single US interest rate was 12 regional Fed Funds Rates. With a fully integrated banking system/electronic money markets, why not simply consolidate those 12 rates into SOFR? Now that all new US domestic debt has been re-indexed to SOFR, if it became the new benchmark rate, it would free up local financial activity and enable regional rates to develop on their own. Almost like (dare I say) a rate determined by the free-market.
The following article from 2019 post the September repo spasm of that year further confirms the Fed’s plan to ditch the Fed Funds Rate and fully replace it with SOFR. Yes, It's from 2019, but further confirms the move away from LIBOR and potentially replacing FFR (IMHO). Biggest confirmation was in the last paragraph. It seems LIBOR attached the Fed to a $200 trilion contagion. If the actual Fed Funds Target was “tiny” in 2019, imagine what it is now…
Consider the multiple trillions that have flooded into reverse repo. Ever since the GFC, there has been a critical need and push for the banks to increase their reserves to combat a financial crisis. From the article:
“According to the New York Federal Reserve, minimum reserve balances required for the eight largest US banks to meet liquidity needs during a banking crisis on any single day could be close to $1 trillion.”
Thanks to the Fed’s tightening policies, banks hold nearly $2 trillion.
If you’re the Fed, WHY on Earth would have your benchmark rate be attached to a $200T contagion (LIBOR/ODM) that forces you to socialize overseas losses for Europe by liquidating your banking sector? Of course, this is just a theory, but I can see why this would be the Fed’s intentions and incentives. Again, Powell is no Austrian economist, but he’s also no academic globalist. I believe as part of his legacy, he is ready to divorce the Fed from globalist puppet strings and have the Fed be America’s bank, He has a job to do: take back US monetary policy. Recall, “until the job is done.”
I will continue to keep tabs on this as time rolls on. Thanks for rolling wit me here. Enjoy your weekend, friends.