The Real Reason Behind Fed Rate Hike

Quote from schizo:

As opposed to the smorgasbord of reasons given by the Fed that the higher discount rate should be construed as a signal that financial markets have stabilized rather than an attempt to tighten monetary policy, I say this is more of a smokescreen trying to placate the concerns of foreign investors like China who holds a buttload of our debt. For one thing, the discount rate, which we all know as the rate Fed charges its member banks, is nearly meaningless because there's no real need for the banks to borrow funds since they're sitting on a pile of cash anyway (better known as excess reserves). Check out for yourself how much these banks are hoarding:
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I agree. I came to the exact conclusion a few days before they announced. If you look at a graph of debt the only 3 areas the gov't can reduce spending are FED(listed as other mandatory in the pie chart), defense, and social security.
/Medicare.http://upload.wikimedia.org/wikiped...png/450px-U.S._Federal_Spending_-_FY_2007.png

Well they're working on the biggie SS/Medicare. They and you better believe beneficiaries will not collect until they're 70yo and that will happen soon. http://www.actuary.org/pdf/socialsecurity/age_oct02.pdf
Defense isn't going down anytime soon because with all the global power struggles we are involved with as a result of our economics the military will need to maintain its strength, and lastly the FED isn't gonna stop its machinations anytime soon.

So where do Japan and China fit in? They subsidize the currency of trade by buying our Treasuries. We printed and/or are printing our way out of the global banking crisis and to do so we radically increased an already unsustainable deficit.

Until we get the economy back in order we need treasury auctions to continue, we need buyers, and the FED needs to continue to attempt to build the economy and job growth. Once the pieces are in place to change the SS age of benefits and the economy are back on track then we are gonna inflate our way out the debt that was printed.
 
"They will separate the risk that's on Wall Street from that which is associated with consumer deposits," Whitney said. "It's going to be a tougher environment."
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I have read a few ideas on this site as to why the Feds raising Discount Rate. I say they are all some what correct however:

The reason the Fed has Raised the discount rate, IMHO is due to the soon to be, Splitting and seperating within the banking system, due to the new regulations that "WILL" pass in congress.

Soon, the Investment Banking, Hedge Fund industry will have not bridge to a Consumer Deposit Bank.

This is just the first signal by the FED that they will support such a move.

Read between the lines and the rise in the discount window will tell you more.


Also, count how many "Investment Banks" moved to Deposit Banking during the crises. And out of those, who do you think will cut out Consumer Deposits and stay strickley IBs.

Get ready for a massive round of job losses if your in Banking.
 
Quote from EMRGLOBAL:

"They will separate the risk that's on Wall Street from that which is associated with consumer deposits," Whitney said. "It's going to be a tougher environment."
____________________________________________________

I have read a few ideas on this site as to why the Feds raising Discount Rate. I say they are all some what correct however:

The reason the Fed has Raised the discount rate, IMHO is due to the soon to be, Splitting and seperating within the banking system, due to the new regulations that "WILL" pass in congress.

Soon, the Investment Banking, Hedge Fund industry will have not bridge to a Consumer Deposit Bank.

This is just the first signal by the FED that they will support such a move.

Read between the lines and the rise in the discount window will tell you more.


Also, count how many "Investment Banks" moved to Deposit Banking during the crises. And out of those, who do you think will cut out Consumer Deposits and stay strickley IBs.

Get ready for a massive round of job losses if your in Banking.
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Ah, yes I see part of bank reform as well as jawboning for quantitative tightening.
 
Quote from Random.Capital:

China is constantly threatening to dump treasuries. Nobody pays any attention to them as they simply cannot do it without cutting their own throats.

IMO the reason the rate went up an inconsequential amount is simply that the Fed hasn't done anything in a while and wants to maintain and aura of being in control.
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+1
 
Quote from Random.Capital:

China is constantly threatening to dump treasuries. Nobody pays any attention to them as they simply cannot do it without cutting their own throats.
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While that may be true to a large extent, I don't believe that it's simply a veiled threat. I don't have time to go into much detail at the moment (I must trade, can't ya see? :D), but I'll stick my neck out and say that China stands to gain more by the decline of the American empire.
 
Quote from schizo:

As opposed to the smorgasbord of reasons given by the Fed that the higher discount rate should be construed as a signal that financial markets have stabilized rather than an attempt to tighten monetary policy, I say this is more of a smokescreen trying to placate the concerns of foreign investors like China who holds a buttload of our debt. For one thing, the discount rate, which we all know as the rate Fed charges its member banks, is nearly meaningless because there's no real need for the banks to borrow funds since they're sitting on a pile of cash anyway (better known as excess reserves). Check out for yourself how much these banks are hoarding:

AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS

So what the hell is the real intention? The real reason in my mind is to clearly send a signal, albeit mixed, to the largest U.S. Treasury debt holders, especially China, that everything is under control. It's no surprise that the sudden announcement by the Fed was made following the looming threats made by China that it would dump U.S. treasuries. China is by far the largest foreign creditor with nearly $800 billion in U.S. Treasury debt (it would be well over $1 trillion if stakes in other investments are considered), of which $34.2 billion was sold in December.

Foreign Holders Of U.S. Debt

Let's also not forget another critical factor. On his visit to China last summer, Geithner reassured his host by promising that "the United States is committed to a strong and stable international financial system. The Obama administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home." But Chinese aren't stupid. They know that we have unsustainable debt levels and, above all, we lack a policy to deal with it. So the REAL question that shouldn't escape the mind of Bernanke and his cronies is just what would happen should China decide to dump in en-masse? No doubt, it's crystal clear by now that the Treasury can no longer sell their debt so easily as in the past, especially at record low interest rates.

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(Courtesy of Seeking Alpha)

To better understand how our huge debt is being monetized, I highly recommend that you read up on How The Federal Reserve Is Monetizing Debt by chris Martenson from Seeking Alpha:

http://seekingalpha.com/article/158330-how-the-federal-reserve-is-monetizing-debt
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Nice work, Schizo.

But you really don't need to complicate things so much. The answer is known in advance and is easy ...

The FED ALWAYS follows the 3-month treasury bill yields.

Plot the Fed funds rate and the 3-mo. T-bill yield and you will see that the FED is always reactive.

No biggie, no need for figure-figure.

Nice work nonetheless. :)
 
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