The data ….
The two-year, ten-year, and thirty-year Treasury rates continued their downward path today. According to data from the U.S. Treasury, the two-year rate moved from 4.07% to 4.05%. The ten-year rate fell from 4.30% to 4.25%, while the 30-year rate fell from 4.55% to 4.51%.
Meanwhile, data from the Federal Reserve Bank of New York shows the Effective Federal Funds Rate for domestic unsecured borrowings between commercial depository institutions is at 4.33%. The Overnight Bank Funding Rate, a measure of wholesale, unsecured overnight bank funding costs, also held at 4.33%.
The Secured Overnight Financing Rate, which measures the cost of borrowing cash overnight secured by Treasury securities, came in at 4.33%, while the Broad General Collateral Rate, a measure of rates on overnight Treasury general collateral repurchase agreement transactions, came in at 4.31%.
The Tri-Party General Collateral Rate, a measure of rates on overnight, specific counterparty, tri-party general collateral repurchase agreement transactions, came in at 4.31%.
Congress and monetary policy ….
Congress is being quiet on monetary policy. HR 126, a bill that prohibits payment of interest on reserve balances, has been the only bill presented in the 119th Congress that comes close to addressing monetary policy. I have my reservations about expecting any further movement on this bill in this Congress. As I shared in another post, the bill’s sponsor, U.S. Representative Warren Davidson, Republican of Ohio, offered no rationale for the legislation either in the text of the bill or in public remarks.
Congress appears to have abrogated its power to value the money, placing that power in the hands of the Federal Reserve System. Specifically, that power appears to lie with the private portion of the Federal Reserve System, namely the banks. Their overnight, short-term lending plus bond market activity appears to front run the Board of Governor’s decision-making about its administered rates, i.e., the discount window rate, interest on reserve balances, and the overnight reverse repurchase rate.
And President Trump appears to have cooled his heels a bit on the issue of getting lower rates. The bond markets appear to be acquiescing to his demand. And the way the two and ten-year rates are falling, we may see a rate cut at the Federal Open Market Committee meeting scheduled later in May. But would a rate cut in May be the right move?
M2 money supply increased 3.86% between January 2024 and January 2025, according to data from the Board of Governors of the Federal Reserve System. This increase represents a slight acceleration in the growth in money supply when compared to the January 2024 to January 2025 period. During that period, money supply increased by 3.81 percent.
An increase in the amount of money in American hands increases the chances that consumer prices will be bid up. Interest rates should respond to an erosion in purchasing power with an increase, yet we are seeing the opposite in the bond markets.
The Fed may not find grace for a cut in the overnight interbank (fed fund) rates given the decrease in supply of reserves. Reserves are that portion of commercial bank deposits that are held in a bank’s vault or at a Federal reserve district bank. The supply of reserves has fallen 7.17% between January 2024 and January 2025. As supply of reserve falls, given the level of demand for reserves stays the same, the price of borrowing overnight, the fed funds rate, should increase as well.
Whether as an attempt to recover the erosion of purchasing power or pricing for a reduction in reserve supply, the Fed should be raising interest rates.
Congress’ failure to address this monetary phenomenon indicates one of two things. Its membership lacks the ability to comprehend monetary concepts or, should inflation continue, Congress wants a political football, namely the Fed, available for an offside kick.
Alton Drew
26 February 2025
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