Interbank market: Federal Reserve rates for a holiday shortened week and Fed clarity.

Today’s rates …

30-Day Federal Funds Futures: 94.70.

Effective Federal Funds Rate: 5.33%.

Interest on Reserve Balances: 5.40.

Discount Window: 5.50%.

EUR/USD=1.0923.

USD/JPY=149.4885.

Today’s definition ….

interbank market– “The interbank market is a global network utilized by financial institutions to trade currencies and other currency derivatives directly between themselves. While some interbank trading is done by banks on behalf of large customers, most interbank trading is proprietary, meaning that it takes place on behalf of the banks’ own accounts. Banks use the interbank market to manage their own exchange rate and interest rate risk as well as to take speculative positions based on research.” — Investopedia.

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Today’s thought experiment ….

During a Bloomberg Television interview this morning, Steve Sosnick, chief strategist for Interactive Brokers, a brokerage firm, provided some insights into trader sentiment. He opined that his trading clients were focusing on options as well as the favorite names in today’s markets. Among these favorite names are the so-called “Magnificent Seven“; seven primarily tech stocks that make up approximately 25% of the S&P 500 in terms of valuation.

Mr Sosnick also saw a tendency of clients toward more speculative trades. This sentiment arguably puts investors into the trading camp. Investors tend to lock their money away into a security over a long term, typically exceeding a year. Traders, on the other hand, could be in and out of a position within days, hours, or minutes.

Given my focus on monetary policy and decision making on the part of the Federal Reserve, what really piqued my interest was Mr Sosnick’s identification of two issues: “Will the Federal Reserve cut rates? If so, why would the Fed cut rates and under what circumstances?” As of today, the CME Group’s FedWatch tool shows that there is a 99.5% chance that the Federal Open Market Committee will keep its target range for the federal funds rate at the current range of 5.25% to 5.50%.

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A number of Federal Reserve System board members and Federal Reserve bank presidents have signaled that market participants should not be too hasty in pricing in rate cuts and I suspect after a couple weeks of this signaling that markets are taking heed of this advice.

I suspect also on the part of the Board that they may take into consideration the disconnect that the average American is feeling between her view of rising costs and the messages of good performance and consumer resiliency market participants are expressing in the financial media.

The Fed may be data driven, but is it ready to darken the growing shroud of economic gloom and doom by raising overnight rates less than two weeks before Christmas at its December 12-13th FOMC meeting?

Alton Drew

24 November 2023

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