Brighter Outlook on Fed Policy Helps Prices Rise; Decline in Banks' Discount Window Borrowings Undercuts Pessimism on Interest Rates
Duffy, John J., American Banker
The U.S. Treasury securities market emerged from a turbulent week Friday with prices rising and yields falling as traders became convinced that the pervasive pessimism over the outlook for interest rates has been overdone.
Prompting the late-week change of heart was data from the Federal Reserve Board that seemed to imply that the central bank is not placing any greater pressure on short-term interest rates to rise now than it ws a month ago, when the rapid growth in the money supply first began to stir fears of a tightening of monetary policy.
Specifically, the data showed that bank borrowings at the Fed's discount window amounted to only $419 million a day in the latest week, down substantially from the previous week's daily average of $678 million.
The Fed's figures on bank borrowing are routinely scrutinized by credit market analysts as an indicator of how generous monetary officials are being in providing reserves to the banking system. A sustained increase in borrowings usually means that the Fed is seeking to restrict the banking system's level of reserves, thus promoting higher short-term interest rates.
Many market analysts believe that the Fed tightened its credit stance slightly in late January when the closely followed M1 aggregate of money supply first broke above its target growth range of 4% to 7%. M1, the narrowest measure of the nation's money supply, comprises currency in circulation and checking account and other demand deposits.
The January squeeze was associated with a rise in discount window borrowings, from $250 million a week to $450 million a week, and an increase in the federal funds rate -- the rate charged on overnight loans of reserves between banks -- from 8.25% to 8.50%. Rates on three-month Treasury bills responded by rising from roughly 7.50% to 8.25%.
As the M1 figure surged an additional $9.3 billion over the four weeks ended Feb. 25, and bank borrowings began to creep over the $600 million mark, traders quickly figured that another tightening might be taking place that would boost the funds rate to the 8.75%-9.00% range. Rates on three-month bills quickly jumped from 8.25% to over 8.75% as traders tried to anticipate the Fed move.
Consequently, the drop in Fed borrowings back to the $450 million range reported late Thursday, coinciding with a decline in the funds rate to 8.50% on Thursday and Friday, brought welcome relief to the market. Rates fell sharply and by Friday morning were showing small net declines over their closing levels a week earlier.
Friday's decline in rate came amid signs that the economy may be considerably less robust in March than it appeared in January and February. The Labor Department reported Friday morning that while the nation's unemployment rate dipped 0.1 percentage points in February, to 7.3%, the economy produced only 119,000 new jobs -- the smallest increase since August 1983. The number of jobs in manufacturing declined 75,000, the average factory workweek fell to 40 hours from 46 hours in January, and average weekly earnings also declined. The overall decline in the unemployment rate during the month came from a jump of 255,000 in service-related jobs. …