17 Mar 2020

My Thoughts on Recent Fed Announcements

Federal Reserve 29 Comments

At Mises.org. An excerpt:

Now what the Fed announced last week is that it will itselfenter the repo market and be prepared to offer up to $1.5 trillion in (newly created) US dollars in order to allow institutions to pledge their Treasurys as collateral and borrow such vast sums. But these transactions won’t be overnight loans; instead, the $1.5 trillion consists of $500 billion bursts of financing in the one-month and three-month repo contracts.

The whole point of this Fed intervention was to keep the implicit interest rate in the Treasury repo market down to acceptable levels. In other words, if the Fed had not intervened, then repo rates would have soared. Remember, last September the repo rate suddenly jumped from about 2.2 percent to 6 percent in two days. That was deemed a crisis at the time, justifying the Fed’s large (and recently expanded) ongoing intervention in the repo markets.

It’s true that when fear grips the world, investors do look to US government debt as a “safe haven.” That’s why US government bond yields collapsed to record lows recently and stock markets are falling: many portfolio managers are switching from equity to fixed-income assets.

But what the spikes in the repo market reveal is that in the very short term, such as a period of 1–90 days, actual cash is king. Right now, asset managers do not at all view a Treasury security “as almost the same thing” as US dollars issued by the Federal Reserve. One way the market communicates such a change in risk appetites is a “skyrocketing” implicit interest rate in the Treasury repo market. People who control actual US cash right now are not as willing to see that transformed into an “equivalent” amount of Treasurys, and so they demand a higher compensation (interest return) to make the asset swap. This is the market process that the Fed is trying desperately to hammer away.

29 Responses to “My Thoughts on Recent Fed Announcements”

  1. Transformer says:

    A bit off topic but do others agree that covid-19 is actually a free-market friendly virus?

    Those most at risk (the old or those already unhealthy because of medical condition) need to self-isolate, the rest (because of the benefits of herd-immunity) are doing society a favor by continuing to socialize.

    In an anarchist world I think that self-interest (plus a dose of desire to do the right thing for society) would actually drive the right behavior . The vulnerable – and I am sure charity would provide the funding for those that need it – would have the incentive to super self-isolate. Everyone else could have covid-19 infection parties. I am sure Las Vegas casinos would step up to subside these events!

    Am I off-base here ?

    • guest says:

      I agree. If you’re the kind of person that worries about this virus, *you* can voluntarily choose to stop making a living and living life, and nobody needs to be responsible for you because nobody is your slave.

      I forgot who, but some politician said, recently, that, if given the choice between getting the economy going again and stoping this health crisis, that he believed Americans would choose to stop the crisis.

      But, for one thing, eventually, they’re the same thing because starvation is also a health crisis.

      Another thing, though, is that businesses do not exixst to help people – that’s what charities choose to do. The point of business is not even to give people a job. The point of a business is to make a profit off of consumers.

      All these promises to bail out businesses and raise unemployment benefits are a socialist’s wet dream. They got what they wanted to get from the manufactured climate hoax with this overblown reaction to a virus.

      And look how EASY it was to get Americans to comply with _LOCKDOWNS_! America is done.

      The only way back is to commit to making profits, and to insist to others that you are not responsible for the losses they took when they chose to not go to work.

      Make them work for what they want from you, and feel good about making a profit off of them, and especially off of the low-skilled poor who are put out of work by the Minimum Wage.

      • Transformer says:

        My initial point was that while many epidemics may be a challenge to anarchist views (because they would best be controlled by the need for some kind of enforced isolation that may be a challenge to NAP) Covid19 might not have been in this class because everyone following their own self interest (with no enforcement) would have led to its containment.

        Looking into it in more detail (including Bob’s podcast on the matter) I see it may be more complex. Some ‘enforced behavior’ may be necessary (my internal jury is still out on this). I’m sure anarchist theory can deal with this but that wasn’t my original point.

  2. Transformer says:

    I agree that the fed announcements are disturbing, but not as disturbing as recent state and local government rules that enforces business shutdowns. This will almost certainly affect small local businesses more than large chains (who will probably end up getting fed handouts!). This is fucking wrong and frankly I am not seeing a strong enough libertarian response.

    • Rob Read says:

      Sorry for the bad language but I feel strongly about this .

      • Transformer says:

        Sorry for the bad language but I feel strongly about this .

        • Tel says:

          The Australian numbnuts have managed an appalling mess. They stubbornly refused to close the national borders, even though that would have been relatively easy (the country is an island and we have an operational border force already in place) so after importing huge numbers or people (including something like 30,000 foreign students) they decided only a complete internal shutdown would be sufficient. They are still puzzling over what to do with all those students while the universities are closed but we shall see what they come up with on that one.

          The best metaphor I have heard so far : after seeing that the horse had bolted they knew there was no point closing the stable door so they shot the remaining horses.

          Robbie “The Fire” Bernstein pointed out that government has the incentive to be seen to be doing the biggest and most audacious action … so they will never head things off early and easily, because there’s no publicity to be gained doing that. Cynical, but fits the available observation. For example in Australia they closed Bondi Beach which was incredibly pointless in terms of protecting anyone, but guaranteed to make the newspapers.

    • Harold says:

      “who will probably end up getting fed handouts!”

      Is that fed handouts, or Fed. handouts?

      • Transformer says:

        For some people nothing tastes better than being fed Fed money

  3. Transformer says:


    Sorry for the bad language but I feel strongly about this .

  4. Chris says:

    This isn’t a response to your article, its just more of a rant that I felt like saying.

    I work at FedEx Freight. For about a year now, long before the virus, the company has been experiencing significantly low freight levels. For the past year or so we’ve on and off been on 4-day work weeks. It’s nearly stopped promotion to full time, reduced hiring of part time, and in October of last year one of the supervisors during a shift meeting informed us that the company had flat-lined (not experiencing growth). The numerous other LTL transport companies seemed to be in the same boat and laying off people. So on the one hand everyone was exclaiming how awesome the economy was, but on the other hand at least the LTL industry was experiencing 2008 all over again.

    When the yield-curve inversion occurred in 2019 I told some people about it at work. I said that with the way I understand economics what they did in response to the 2008 crash – printing money and bailing people out – didn’t ‘fix’ the problem. It only kicked the can further down the road and that the next one will be worse. With some of them I even attempted talking about the 1% interest for 1 year in response to the dot-com crash vs the 0% for 7 years in response to the housing one. If they had an opinion on the bailouts from housing crash it was an extremely negative one. That combined with all that was going on at the company and their own googling of yield-curve inversion I think what I said ended up being effective.

    Anyhow fast forward to today. I was talking about the virus with an apolitical coworker of mine. The only time I can remember talking about politics with him was when he said that his mother voted for Bloomberg and referenced the minimum wage. At the time, I tried to explain that the minimum wage is in fact a net bad and used $100/hr as an example. He didn’t even bat an eye at $100/hr (if anything he was excited about such a prospect). So today I talked about how I thought the economic harm from the panic and gov. response is going to be far worse and have longer lasting consequences than the virus itself. He referenced Trump giving everyone a paycheck in the mail. I guess I was behind on the news and catching up today that sure enough seems to be a possibility. So now I’m going to have to try and explain why that’s dumb next time. When I said that one of the most frustrating things about the virus will be people blaming it for the recessions/crash that occurring he said “seems like a pretty good reason.” For the average american, it’s a dam good reason – that’s the frustration. I tried saying that it may have triggered and will make worse the recession/crash but even without the virus it was going to come because of all the money printing in the past. It was sort of a small-talk conversation, so he wasn’t actually following along and when he heard the words “federal reserve printing money” he said somewhat dejected “they’re not printing money?” (as in he wanted them to). I responded they are and that’s the problem. When I think this co-worker of mine is probably your average american I’m not filled with hope about our future.

    • Paul says:

      I think a better measure is the Baltic Dry Index, but I think even that can be problematic.

      In previous lives, I’ve attempted to do business with FedEx Freight, and it’s terrible. They have a crazy-high “MSRP” they provide on every RFQ. Getting a better rate requires talking to a rep.

      The rep never calls.

      All. Day. Long. there are freight and logistics companies cold-calling businesses trying to sell freight services of every variety. Any one of them will have prices a fraction of the MSRP provided by FedEx Freight.

      Also, many of the Chinese factories and exporters provide shipment to businesses, (INCOTERMS DDP).

      Unless FedEx Freight division substantially changed how they do business, they were on their way out as relic from a bygone era.

      The economics arguments against minimum wage need to be declared dead. Hazlitt provided these arguments and how long ago they already fail to persuade?

      Emotional arguments are better. I have a longer version of this, but it is more effective to tell the story of what an unskilled laborer experiences. It is not 100% effective, but far more effective than the “cold-hearted” and failed economics arguments. Note that this argument presented correctly forces opponents to reckon with whether they are in the same evil category as the stereotyped greedy employer.

      Another approach is to go back and listen to Murphy’s episode asking liberals to explain why they don’t support a $50 or even $30 per hour minimum wage – that is a better way to go if you go down that path.

  5. Tel says:

    Strictly speaking, Treasury bonds are not collateral, they are a paper note like any other paper.

    Collateral (IMHO) needs to be something tangible of value. A chunk of land might be collateral, or a bar of gold, but the Treasury can at any time scribble up a few more bonds, so clearly these are intangible.

    There’s nothing wrong with the temporary exchange of longer term paper notes (Treasury bonds) for shorter term paper notes (cash) but no genuine asset backing has entered the deal (other than the overall protection racket system where you may money as tax in exchange for not getting beaten up, but that system is the same regardless of whether you hold bonds or cash).

    • Bob Murphy says:

      Tel so you think a $100 piece of actual paper currency wouldn’t count as collateral for a loan either? Like if I rented some golf clubs from a clubhouse, and left a $100 bill with them as collateral, you’d say no, instead I have to go get them a dozen eggs?

      • Tel says:

        I think you analogy is incorrect, the Treasury note is an IOU note.

        Leaving a Treasury note as collateral for a loan would be more like you writing an IOU note to the clubhouse promising to give them a set of golf clubs next week, and then leaving that at collateral for the clubs.

        Slightly stronger in as much as government IOU notes get taken more seriously than Murphy IOU notes but structurally the same.

        Look at it from the view of limitations … because neither you nor the clubhouse can print money, that $100 is a limited asset from your point of view, so you will be careful with it. Neither you nor the clubhouse can print golf clubs either, so you exchange a limited asset for a limited asset.

        However the Treasury has no limit on the IOU notes it can write (OK there is the “debt ceiling” but that’s a joke) and the Fed has no limit on how many FRN’s it can issue. Exchanging a note for a note while pretending this is collateral is merely a two-step method of printing money … leaving a slightly more complex paper trail. No limited availability assets take part in the transaction at all (whether that be limited by the physical world, like land, or limited by legal requirements like the $100 in your pocket).

        • Bob Murphy says:

          Tel that’s a really long way for you to say, “Yes my logic forces me to say a $100 Federal Reserve Note would also not count as true collateral.” That’s fine if it’s your view, but why 5 paragraphs?

  6. Capt. J Parker says:

    Let’s say that I run a medical device manufacturing company. It’s a nice profitable business making a product that people need but it is also in a competitive market. The product is sold in a sterile condition and is manufactured in a clean-room as is necessary to keep biological contaminates below a specified level. The maximum specified level of biological contaminates assures that the sterilization processing step does in fact yield sterile product. A vital part of keeping biological contaminates within specified limits is that operators in the clean-room must wear N95 masks. Production is labor intensive so lots if masks are used.

    Now, along comes COVID 19 and the price of N95 masks spikes. The new cost of the masks is great enough that my business is no longer profitable in the short run. The mask price spike is expected to be temporary but me and 80% of the suppliers serving the market I serve are not likely to survive the period of higher costs.

    The Federal N95 mask Reserve has a large stockpile of masks they are considering releasing into the market which would greatly reduce the temporary price spike in mask prices. This reduction wouldn’t make me profitable again but it would reduce my losses enough that I would stand a good chance of staying in business through the temporary crisis and regaining profitability when either N95 masks return to their old pricing or when I am able to validate using an alternative to the N95 masks.

    What egregious harm will be done by the Federal mask Reserve in releasing the masks to blunt a temporary price spike caused by a temporary spike in demand? Consider that if they don’t, there will be a major consolidation in my market where the end result is more unemployment, greatly fewer suppliers with higher prices to consumers because of the increased market power of the small number of remaining suppliers?

    • Harold says:

      “What egregious harm will be done by the Federal mask Reserve in releasing the masks to blunt a temporary price spike caused by a temporary spike in demand? ”

      None as far as I can see. We can thank the foresight of those wise officials to create such an organisation. However, I am not sure there even is a Federal N95 mask reserve!

      • guest says:

        “We can thank the foresight of those wise officials to create such an organisation.”


        From the book, “Forty Centuries of Wage and Price Controls: How Not to Fight Inflation”:

        “The New Republic Tries Old Experiments


        The sporadic attempts during the seventeenth and early eighteenth centuries to control the economic life of the American colonies increased in frequency with the approach of the War of Independence.

        One of the first actions of the Continental Congress in 1775 was to authorize the printing of paper money—the famous “Continentals.” …”

        “The Congress, at least when addressing the public, professed not to believe that their paper money was close to valueless but that prices had risen mainly because of unpatriotic speculators who were enemies of the government.

        “On October 20, 1774, the Continental Congress decreed that “all manufactures of this country be sold at reasonable prices,” and that “vendors of goods or merchandise will not take advantage of the scarcity of goods . . . but will sell the same at rates we have been respectively accustomed to do for 12 months last past.””

        This has already been done before – many, many times. This isn’t foresight, it’s ignorance.

    • Chris says:

      Why are you running a business that’s so fragile as to be taken down by the price of masks? Maybe you do need to fail and someone else give it a try. Maybe their solution would be to make their own masks. Or maybe they would be better able to predict a price rise and stock up before that happens.

      Where did this federal mask reserve get all its masks from? Wouldn’t it buying all these masks have raised the price in the past, causing your business to fail?

      Why are you not likely to survive the period of higher costs? A higher market price encourages new suppliers in the market. It discourages people from overbuying freeing up the resource for those more in need and willing to pay the higher price. Why is your business needs more important than the people willing to pay the higher price? A precedent is also set: the next time something like this looks like its about to occur suppliers will stock up thus making the next price spike not as high and even more temporary.

      None of this occurs in real life because of price controls. In your hypothetical scenario, none of this would occur because of your federal mask reserve.

  7. Capt. J Parker says:

    The competitive nature of the market requires the efficient use of capital. My firms supply shock mitigation strategy was based on event severity and probability analysis and an appropriate and efficient amount of capital was used for supply shock preparedness. But, because knowledge of the future is imperfect, the current supply shock falls outside the modeled mitigation strategies.

    The Federal mask Reserve employs a resourceless production technology unavailable to private firms because of existing laws so, their mask reserves were created essentially out of thin air.

    Sure, price signals cause supply and demand effects but in this scenario everyone expects the shock to be temporary and no one is investing in maskless manufacturing because they don’t see a return on investment because the situation is temporary.

    I never claimed my needs are more important than those of other mask consumers. I’m simply asking why would an intervention from the masketary authority in this case (assisting me and other mask consumers) be so bad?

    • Harold says:

      With the masks, we have a situation where mask manufacturers have not been producing at a rate that can meet the sudden increase in demand.

      Presumably the price increase in the masks will cause them to switch efforts from producing, say diapers to producing masks. That will take time, and in the interim there will not be enough masks. This will result in health workers getting sick and an undeniable cost.

      What is needed is just enough masks from thin air to get us over the hump, but not too many so the manufacturers do not switch efforts to match the new medium term demand.

      If everyone could be assured this was the case I do not see any problem with the release of these masks. Essentially, if masks can be purchased on the market then they are not issued from the reserve. This probably requires some price ceiling, as masks will always be available at some price. The new equilibrium will be a higher price for masks.

      • Capt. J Parker says:

        Can I paraphrase your reply as: The Federal mask Reserve should distribute masks freely to otherwise profitable enterprises at prices high enough to dissuade those operations not truly in need?

        • Tel says:

          I’ll let you into a secret … there are no actual masks in the Federal mask Reserve.

          They only keep some IOU notes in the vaults.

      • guest says:

        It’s too bad that a nation’s subjects (I mean citizens) are too stupid to come up with alternatives to these masks.

        Health care workers could use:

        – Oxygen masks
        – Multiple layers of paper towels (not difficult to manufacture)
        – Multiple layers of bedsheeds (just wash them)

        These masks don’t cover the whole face, folks. Go watch MacGuyver and learn how to improvise.

    • Chris says:

      The panic resulted in a risk to your firms supply chain that you failed to sufficiently model. If you go under because of that is it the end of your product/service forever? Are you saying no-one will take a stab at filling that market need and that they wont try to better take into account this risk? Firms in real life raise their prices, they downsize their work-force to the more efficient workers, they lower the quality of their products, they save some extra cash to weather temporary losses. You can’t do the same to survive? Maybe going forward, you wont do these things because you know the federal mask reserve will come save the day.

      If the federal mask reserve can make their masks out of thin air then why don’t they just become the permanent sole supplier of masks in your hypothetical? The current suppliers would be better off making something else since we’ve apparently solved the problem of scarcity, at least with masks.

      The failure of your firm does indeed cause harm, the temporary higher prices does indeed cause harm, but failure is an important aspect of free markets. Those supply and demand effects create a more resilient market going forward: a firm that’s better able to account for this specific panic, a grocery supply store that now stocks up on masks if there is news of an outbreak of an unknown virus somewhere in the world, a company that diverts their productions to masks earlier, a new mask supplier that saw the craziness caused by the temporary price shock and came up with a better way to make masks, an investor who doesn’t succumb to the panic next time around, a bank more willing to lend money to your firm in times of mask price-shocks. Something about the pre-shock price levels, supply levels, and/or behavior of the various actors need to change because such a shock is now a possibility going forward. But this doesn’t happen because everyone knows the federal mask reserve is able to keep swooping in to ‘save the day’. So the markets are forever dependent on your federal mask reserve. And that’s what so bad.

      Now the thing is, if the the federal mask reserve is actually able to produce a mask out of thin air, then I actually agree they should swoop in to save the day with masks, hell even become the sole supplier of masks. If they cant make a mask out of thin air – they just happened to be stockpiling masks over the years – then its like a gov. rainy day fund and should be used. But the mask reserve stocking back up on masks have obvious consequences to your firm and mask-buyers. And your firm should probably hire one of these masketary authority figures because they apparently know the right amount and timing to stock up on masks for the next mask buying panic.

      If you want to make your masks (a physical good) be like money then your hypothetical is weird. Money is a medium of exchange and your masks aren’t. Your labor, your production, your accumulated wealth is ‘stored’ in those dollars. When the federal reserve creates money out of thin air, whose labor, whose production, whose wealth is stored in those dollars? The answer of course is a little bit of everyone’s (inflation). If your masks were a medium of exchange like money, then the creation of masks out of thin air would have the same bad things: the misallocation of resources in need of a correction, long term inflation stealing a little bit from everyone, the risk of short term hyper inflation, and the metaphorical ‘can’ that keeps being kicked further down the road where it becomes a bigger can and eventually wont be able to be kicked further.

      • Capt. J Parker says:

        In my example the demand for masks varies dramatically causing the price to vary dramatically. You and Harold seem to agree that if the dramatic changes in demand for masks are the result of a one time event that is expected to be temporary and short lived then an intervention by someone to reduce the price swings by supplying more masks would be beneficial.

        In the financial world today the demand for cash balances is varying dramatically causing the price of credit to vary dramatically. If the cause of the dramatic change in demand for cash balances is a one time event that is expected to be temporary and short lived then why doesn’t it make just as much sense for someone to intervene to reduce the price swings by supplying more dollars?

        The inflation you fear will only happen if the Fed decides to keep the money supply high even after the one time event has passed and the demand for money has returned to pre-crisis levels.

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