Submitted by Taps Coogan on the 2nd of May 2019 to The Sounding Line.

Taps Coogan: Just a quick administrative point, I have been working through some issues with the site that have been causing long load times and some sporadic errors. Soon enough, the site should be running better than ever. For the time being, my apologies.

Morgan Stanley Investment Management Global Fixed Income CIO Michael Kushma recently spoke with CNBC’s Rick Santelli about the supposed need for interest rate cuts while the Fed is paying banks 2.35% expressly not to lend their reserves out into the economy, an issue we have discussed on several occasions.

Rick Santelli:

“…Quantitative easing: we still have a whole lot securities even though it’s not as many as we did have. We now have interest on reserves which, by the way is 2.4%… Have we stopped paying attention to how odd that arrangement really is? For people out there that are looking to borrow money, start a business, it certainly seems as though we’ve handicapped the banking system by taking a lot of their seed corn, paying them 2.4%, and kind of taking it out of the game.”

“… If the President, and Kudlow, and Cramer, and so many people think they have to ease because (the economy) is not white hot enough, wouldn’t that be a good way to go? Dump some of those reserves into the system?”

The Fed Funds rate recently traded above the interest on excess reserves rate (IOER) for the first time since the wake of the Financial Crisis, implying that there is sufficient demand from overnight markets to compete with the IOER for bank reserves for the first time.

Perhaps, in an effort to suppress the rise in the Fed Funds rate, the Fed did exactly what Rick Santelli recommended and cut the IOER to 2.35% just hours after yesterday’s interview, while holding the Fed Funds rate constant. Yet, with the Fed Funds rate already above the IOER, it is questionable how effective lowering the IOER even further will be.

Time will tell, but one interpretation is that overnight interest rates are seeing organic upward pressure for essentially the first time since the Financial Crisis.

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