More like Theatre of the Absurd, will all due respect and apologies to Albert Camu and Samuel Beckett.
The Fed announced a “meeting under Expedited Procedures” that will take place on Monday, November 23. The “matter(s) considered” is a “review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks (regional). You can see the notice as posted on the Fed website.
This meeting appears to be much ado about nothing – with all due respect to Shakespeare. Why? The matter to be considered is the rates charged to banks under the Fed’s “Primary Credit” program – LINK. This is commonly, generically referred to as the “discount window.”
Historically the discount window was the mechanism used by the Fed to enable member banks to borrow on a short term basis to meet temporary liquidity issues. With the development of financial market technologies and the liberal use of the printing press since 1980, the discount window – i.e. the Primary Credit program – is rarely used. The current rate charged to discount window borrowers is 50 basis points above the Fed Funds rate.
Let’s take a look under the hood (click on image to enlarge):
The table above is from the Fed’s latest update on its balance sheet. I’ve shaded in yellow the assets (loans to banks) that would be subject to the Fed’s “advance” and “discount” rates, which are the topic of the “emergency” meeting. If you take a magnifying glass to the numbers, you’ll see that there’s only $105 million that’s been borrowed from the Fed’s “discount window.” It’s next to meaningless in the context of the Fed’s $4.4 trillion balance sheet.
If you are interested, you can read the press releases from the last two monthly meetings which dealt with the discount rate policy: LINK
It is highly likely that the Fed will raise the discount rate at Monday’s meeting. It will have absolutely no affect on the Fed’s overall monetary policy and no affect on the economy. However, it will definitely reinforce the Fed’s poker face with regard to the outcome of its December FOMC monetary policy zoo-fest.
In fact, the Fed has in the past raised the discount rate to signal a tighter stance in monetary policy only to whiff on raising Fed Funds rates. It’s pure Kabuki Theatre.
I really don’t know if the Fed will call its own bluff and raise the Fed funds rate. It doesn’t really matter. If the Fed raises rates it will trigger another move straight up in the dollar, which will further crush U.S. manufacturing exports. I also have a feeling, although I can’t prove it, that even a small increase in bank funding rates (repo rates) would possibly trigger an “uncoiling” of some big derivatives trades in which the TBTF’s are stuck.
One last comment. The KC Fed manufacturing survey was released today. It nudged into positive territory after registering negative to highly negative readings for the previous 8 months in a row. It turns out, if scan through the details of the report – KC Fed manufacturing survey – you’ll see that the reading of 1 (“one”) in the composite index was achieved using “seasonal adjustments.”
It appears that the composite index was “juiced” both with seasonal adjustments and with expectations six months out – aka the “hope index.” A further, deeper reading of the report shows that on a not seasonally adjusted year over year comparison basis the “composite index” was -5 (negative five) for November. In addition, the production index was negative to deeply negative on this basis for 10 of the last 11 months. Ditto for average employee workweek, shipments and new orders for exports. In other words, the economy is in bad shape and getting worse.
The Fed may well raise in December. But if it does, it will throw the U.S. economy into a depression that will make the 1930’s depression look fun. Having said that, I believe that the sudden and covert meeting called for Monday is nothing more than an opportunity to use a hike in the meaningless discount rate to jawbone/frighten the market into believing in December’s Santa Clause appearance just after the FOMC meeting.