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The Big Fed Thread

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On 23/06/2015 at 20:36, interestrateripoff said:


As noted the swap lines remain open, but only to certain central banks. From memory I think they are the ECB, BoE, BoJ, BoC, SNB. The US is fearful of blowback into the US system, the initial bailout was only going to be open to US banks, at which somebody mentioned 25% of the US banking system was foreign owned and they realised if the swap lines weren't open it could increase US mortgage costs as interest rates would be pushed up as there would be a global demand for dollars.

The US has the Eurodollar market which it has no control over.

"The dollar is our currency, but your problem."

John Connelly

However the Eurodollar market is in your currency and ultimately your problem.

The Federal Reserve's foreign exchange swap lines have been renewed.  This is quite a good marker of the lack of dollar liquidity. 

FT Alphaville: Why FX swap lines are back (Registration but not subscription required.)

Edited by Will!
Renewed, not re-opened.
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Financial Times: US Treasuries: the lessons from March's market meltdown

From the comments:


Tim Young

I was not involved in the US treasury market during the financial crisis, but I did experience something similar in 1998, with the demise of Long Term Capital Management (which, less publicly, probably caused big losses at other hedge funds too).  Old, high coupon bonds that were deliverable into the Treasury Bond contract (nominally thirty years but in practice, because of the way that treasury futures contracts worked, behaving more like a fifteen year treasury, meaning that some of the bonds practically traded by appointment) became very cheap.

The episode left a lasting impression on me, because it provided me with my most successful days, and allowed me, by taking the other side of the trade, to make back what I had lost shortly before being sceptical that the Fed would ease monetary policy in response to the financial market turmoil at the time when there was no price stability reason to do so.

To me, that episode marked the first occasion when it became obvious that the Fed was willing to compromise their monetary policy principles to mitigate financial market turmoil.  While shocked, at the time, I thought that the absence of any real economy impact of the brief financial market turmoil would make the Fed more sceptical about responding so readily to financial markets calling wolf in future, but what actually happened was that the Fed seemed to congratulate themselves for "saving the world" and got the idea that they could do the same again.  Thereafter, the Fed seemed willing to let financial market booms run and, if that faltered, "mitigate the fallout", acquired a taste for the adulation of grateful investors, and mission creep set in.  Hence where we are now.


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Yellen says higher interest rates would be 'plus' for U.S., Fed- Bloomberg News


She's such a tease, and I'll believe it when I see it, but hopefully it's managing expectations in advance of a nice tasty hike rather than that forward guidance nonsense.

I'm massively hopeful the BoE in their vigilance will come to the same conclusion a couple of months after.

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