The Son of Finance of the Great Age

  Chapter 149 Fed rate hike

  The Federal Reserve System, commonly known as the Federal Reserve, is the central banking system of the United States. Unlike most central banks in the world, the Federal Reserve is a private banking system composed of more than 3,000 member banks. The U.S. government does not own the shares of the Federal Reserve. It’s just that more than 90% of the profits of the Federal Reserve are turned over to the U.S. Treasury every year, and all senior employees of the Federal Reserve are appointed by the U.S. government.

  The Federal Reserve has three committees, namely the Federal Reserve Board, the Federal Open Market Committee and the Federal Reserve Bank. Among them, the most powerful is the Federal Reserve Board. The seven members are all nominated by the president and approved by the Senate. They are all permanent members of the Open Market Committee. rate” and has an absolute numerical advantage in the 12-member Federal Open Market Committee, which can determine market interest rates.

  In addition to the above two institutions, there is a Federal Reserve Banking System. In the United States, the law stipulates that national banks (commercial banks registered with the Office of the Comptroller of the Currency) must join the Federal Reserve Banking System, while commercial banks registered in the states are exempt from the jurisdiction of the Federal Reserve. But in fact, because the assets of the commercial banks under the Federal Reserve occupy an absolute amount in the market, those commercial banks that do not join the Federal Reserve have to follow the Fed in terms of various policies.

The central bank has three magic weapons to regulate the market, which are interest rate, discount rate and rediscount rate, and deposit reserve ratio, and these three are all determined by the Federal Reserve Board. In addition, the dollar is in an absolutely strong position in the world. Therefore, the chairman of the Federal Reserve Board is known as the most powerful person in the world, and almost all financial institutions rely on his breath to survive.

   Alan Greenspan is such a person!

   On January 21, 1994, Greenspan came to the White House. The chairman of the Federal Reserve came to the District to visit President Clinton. He brought a special purpose, which was to raise interest rates.

   At this time, under the stimulus of low interest rates, the United States has achieved economic growth for one and a half years, which is what almost everyone likes to see. However, the Federal Reserve, which has been keeping an eye on the market, found that due to the excess liquidity in the market due to the low interest rate policy, the United States may soon enter a dangerous situation of inflation. After discussing with colleagues, Greenspan made a decision to raise interest rates. The second time I came to Washington was to inform the president and his staff.

   "Rise interest rates? Are you kidding me?" As Greenspan expected, this was the first reaction of government officials with little knowledge of economics. This time it was Vice President Al Gore who asked the question. Although he has a huge economic staff team behind him, no one thought that the Fed would actually make a decision to raise interest rates at this time.

  Vice President’s doubts are justified. In the history of the United States, each small-scale interest rate hike usually means the arrival of a cycle of interest rate hikes, and the market has thus formed such an expectation. If this expectation is finally realized, long-term interest rates will rise sharply as a result, and the final result will be the collapse of the bond market, which will inevitably lead to a "hard landing" of the economy.

  A hard landing in the economic sense means that in the process of controlling inflation, economic growth stagnates due to the tightening of factors such as credit and liquidity, or even presents a recession. Corresponding to it is a soft landing, that is, in the process of controlling inflation, the economic growth can still maintain a moderate growth.

   Regarding the vice president's questioning, Greenspan had already fully considered this issue before coming to the SAR. In fact, in his opinion, the current primary consideration is not the bond market, but the performance of the stock market. Now that the S&P 500 has hit a record high of around 470, it's time for a correction.

"Mr. Vice President, as you may not know, long-term interest rates are mainly affected by inflation expectations. If we raise interest rates at this time, the market will understand that we have maintained enough vigilance for price changes, so that the market will be on the lookout for Inflation expectations are bound to fall, and correspondingly, long-term interest rates will fall. Personally, I think this rate hike is good news for the bond market.” Greenspan said eloquently.

He is naturally qualified to say these words. You must know that he has been working as an economic consultant at the New York Reserve Bank before he became the chairman of the Federal Reserve Bank. These guys are more well rounded.

  Long-term interest rate refers to the interest rate of financial assets with a financing period of more than one year. The difference between long-term and short-term in the capital market is usually limited to one year. Due to the strong liquidity of treasury bonds, the yield of long-term treasury bonds is usually used as a sign of long-term interest rates. Among them, the yield of ten-year treasury bonds is an indicator of the global economy and financial markets, and also determines the direction of long-term interest rates.

It must be pointed out that the Fed has a high level of independence when making economic decisions, as if Grispan came to the White House this time, his task is to inform relevant government personnel that the Fed is about to raise interest rates The decision and the reason for raising interest rates to convince the government. Even if government officials disagree, the Fed will eventually raise rates.

"I hope so!" Gore looked back at his economic advisor, and after seeing Tyson, a female economist from Berkeley University, shook her head slightly, she turned her head and gave Greenspan a deep look, "I hope The market should not react too sensitively to this."

  Greenspan's wrinkled face suddenly showed a smile. He was naturally very satisfied with being able to persuade the government in this way, and the rest is the Fed's own business.

Two weeks later, on February 4, 1994, after chairing the Open Market Committee, Greenspan recommended a small rate hike, set at 25 basis points, to curb inflation expectations , which is 0.25%.

It should be noted that the way the Federal Reserve adjusts interest is achieved by adjusting the federal funds rate. This fund is formed by the member banks of the Federal Reserve to adjust the reserve position and daily bill exchange netting. The funds in it are provided by member banks. Composed of excess reserves and the surplus from the netting of bill swaps. Because federal funds borrow without collateral and interest rates are lower than the official discount rate, the fund borrows a lot of money. Over time, the interbank rate on this fund became the American interbank offered rate.

  Due to risks in bank operations, the laws of almost all countries stipulate that banks must hand over part of the depositors' funds to the central bank after absorbing them. This part of the funds is called deposit reserves, which are used to compensate depositors in the event of future bankruptcy. Commercial banks often reserve part of the funds during this process, and this part of the funds is called excess reserves.

Because the bank's deposit and loan funds are changing every day, there may be a surplus or a shortage of statutory reserves every day. At this time, you can borrow or lend funds from other banks, forming an interbank lending market. The interest rate, even for one day (overnight), has an interest rate, that is, the interbank offered rate.

When the Federal Reserve raises the lending rate in federal funds, the commercial banks that borrow from the Federal Reserve may turn to other commercial banks to borrow funds, but the Federal Reserve can sell treasury bonds in the open market and absorb the excess excess reserves of other commercial banks. The operation will eventually pull the interest rate in the market to the position they want.

  Huaxia is very different. Basically, when the central bank monitors the market and finds that it is necessary to raise or lower interest rates, it often solves the problem with a single document. This kind of non-market behavior is extremely harmful, because the cost of funds is not determined by the relationship between supply and demand, and it often does great harm to the real economy before and after the adjustment.

Having said that, the reason why the Federal Reserve raised interest rates by 25 basis points this time is to correct the market through a more "gentle" rate, because for a market with hundreds of billions of dollars, such a rate increase is already enough. to influence the market.

It’s just that this time Greenspan was wrong in his estimation of the bond market. In fact, when the Fed announced an interest rate hike, the S&P 500 index fell from 480 points to 469 points, a sharp drop of 2.27%. Just as he expected, he began to enter the adjustment channel and once fell to 435 points. At least from the perspective of the stock market, his logic was very successful.

  In the long-term interest rate market, Greenspan’s original idea was to raise interest rates to dispel the market’s expectations for inflation, that is, the long-term interest rates will fall due to the lower expectations, and the income from investing in long-term treasury bonds will eventually rise. However, due to the rapid development of hedge funds in the past few years and the influence of the shadow banking system formed by a large amount of leverage between long-term and short-term interest rates, the development of the bond market is far from operating as he thought.

As mentioned above, hedge funds are far from being able to satisfy the little income obtained from investing in bonds, so they build positions in the treasury bond futures market on a large scale. Since the volatility of treasury bond prices is very small, these hedge funds can The leverage used is extremely high, generally as much as 100 times. That is, a long-term government bond with a face value of 1 million US dollars can be bought and sold in the futures market for only 10,000 US dollars, and greedy hedge funds are not even willing to pay the 10,000 US dollars, but lend the 10,000 US dollars through brokers. Dollar.

When the market is right, there is naturally no problem with this kind of loan relationship, but if the direction is completely opposite to the market, then the broker must add more margins in order to avoid risks. And maintenance margin, it is necessary to reduce the position in hand.

  The question is, there is no market that can accommodate such a large amount of funds like the bond market (except the currency market). If hedge funds sell bonds in a swarm, who will take them? In this way, the number of people who take orders is less than the number of people who sell orders, so the seller will inevitably reduce the price again and again in order to complete the transaction. In the end, the price of bond futures and even bonds will fall to an unbelievable level, and even cause a big shock in the entire market. crash. At that time, these hedge funds may lose everything!

   All of this stems from an unexpected interest rate hike by the Federal Reserve!

   Thank you book friend napoleon for your monthly ticket support! Thank you for making me think about it, Magic Dragon and War Ghost for continuing to reward! The author is working hard to design a new plot, thank you very much for your attention to this book~~

  (end of this chapter)