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Why Did the Federal Reserve Injected $88.1 Billion, in the U.S. Economy, this Past Thursday?

By Glenford S. Robinson

Let’s Find Out!

Let’s see how well our economy did in the past week, from the last time we published our Weekly Review, on the U.S. Economy. We shall proceed in chronological order from first to last.

On Tuesday, October 8, 2019 at 8:30 am, the U.S. Bureau of Labor Statistics and Department of Labor, released the Producer Price Index, (PPI). The Producer Price Index, measures the change, in the price of goods sold by manufacturers, and thus, functions as a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.

A higher than expected reading, should be perceived, as positive for the U.S. economy, and bullish for the USD, while a lower than expected reading, should be perceived, as negative for the U.S. economy, and bearish for the USD.

The PPI reading, gives us some degree, of predictive insights on inflation rates, well before inflation data becomes available.  As we can see in the PPI Report, Month over Month, for September, the reading of -0.3% came in well below forecast of 0.1% and a previous reading of 0.1%. The current readings of the PPI suggest, inflation rate could be exhibiting downward pressures. A tell-tell sign, that the economy has slowed down, and will need monetary stimulation from the Federal Reserve.

Now that we have reviewed the PPI Report and pointed out that it predicts the inflation rate to some degree, we will now go over the inflation indicator itself and that is the Consumer Price Index (CPI). We will talk about the Core Consumer Price Index right now. The Core CPI measures changes in price of goods and services, excluding food and energy. The CPI measures changes in prices in regards to the consumer, and measures changes in consumer purchasing trends and inflation.

A higher than expected reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD.

Let us now go over the current readings of the Core CPI Report released by the U.S. Bureau of Labor Statistics on Thursday, Oct 10, 2019 at 8:30 am, Eastern Standard Time. The current Core CPI reading of 0.1% missed forecast of 0.2% and a previous reading of 0.3%. This result suggest that the inflation rate declined by 0.1%. A reading such as this confirms that the U.S. economy has declined, two few dollars chasing too many goods. In other words, there is a reduce of money supply in the U.S. economy. Wow! It seems as if, we are now staring recession straight in the face. Oh, my gosh! I am scared! Let’s see what the Federal Reserve has done about this.

Well, on Thursday, October 10, 2019 the Federal Reserve Bank of New York, added $88.1 Billion in the U.S. economy, to combat funding pressure, in money markets, thereby using the market for repurchase agreements, or repo, and will add more money in coming weeks.  When the U.S. economy needs a financial boost, the Federal Reserve provides money in the form of loans, to central banks.  The Fed added the $88.1 Billion to Stimulate the Economy because the U.S. Economy has begun to Slow Down dramatically and the Core CPI result of 0.1% show this by coming in below forecast of 0.2%, well below the previous reading of 0.3%.

This means that inflation has dropped significantly. The Fed does not like this at all, and Neither do I. The Fed likes to maintain inflation at 2%, but the way things are going, it doesn’t seem as if the Fed will be able to raise inflation to such a level anytime soon. The inflation rate rose from 1.6% to 1.8% recently, following the first interest rate cut in over a decade, and it seems as if the current inflation rate may fall again.

The Fed accepted request from banks for $45.5 billion in overnight reserves in return for collateral in the form of Treasury and mortgage securities. In a separate operation the Fed accepted another request from banks totaling $42.6 billion in 14-day loans. The banks will once again offer collateral in the form of Treasury and mortgage securities to the Federal Reserve in return for the money.

The repo market provides the platform for borrowers and lenders to interact. When borrowers need cash from lenders, they offer collateral in the form of safe securities, such as treasury bonds in exchange for short-term loans from lenders. Loan terms can be as short as overnight.

The Fed regulates the supply of money in the financial system by utilizing several means, and the repo market happens to be, one of those means. The Federal Reserve, takes on the role of a lender when it adds money to the financial system, through the repo market. In the repo market, lenders can include money-market mutual funds, banks or hedge funds.

These financial entities, embark on such transactions, when seeking to earn higher interest rates, than what is available from holding very short-term, government securities. Banks, securities firms, and hedge funds borrow money to use as cash for financing positions in their respective investment markets. 

Last month’s shortage of available cash in the financial system caused repo rates to rise as financial companies scramble for overnight funding, which subsequently led the Fed to begin offering repo loans. The Fed took such actions during the last financial crisis in 2008, which tells us that our economy could be revisiting such crisis again, especially if the trade war between China and the United States do not come to an end.

The Federal Reserve said last week that it will extend its scheduled repo lending to November 4th. The Fed said it will continue offering overnight repo loans for at least $75 billion, each night, until November 4th. It also said it will extend its two-week repo loan program as well.

The Federal Reserve plans to offer at least $45 billion between October 8th and October 11th. And after that, the available amount will drop to $35 billion through October 29th.  

Let’s see how the JOLTs Job Openings Report did for August. Would anyone like to guess? Please be honest and put your response in the comment area below the video. Ok, here we go. The current reading of the JOLTS Job Opening Report for August released on Wednesday, October. 9, 2019, at 10:00 am, Eastern Standard Time, came in well below the expected 7.191Million Job Openings, posting a disappointing reading of 7.051 Million, well below previous readings of 7.174 Million job openings.  

The US Bureau of Labor Statistics conducts the JOLTs Job Openings Survey to help measure job vacancies. The Survey collects data from employers about their businesses’ employment, job openings, recruitment, hires and separations. On the last day of the month the JOLTS Job Openings Report defines all unfilled job positions.

An open job position meets all three of the following conditions:

1.  A specific position exists and there is work available for that position.
2. The job could start within 30 days, whether or not the establishment, finds a suitable candidate, during that time.
3. There is active recruiting for workers from outside the establishment location that has the opening.

A higher than forecasted reading should be perceived as positive for the U.S. economy and bullish for the USD, while a reading lower than forecast should be perceived as negative for the U.S. economy and bearish for the USD.

So, based on the current JOLTS Job Opening Report for August, the economy continues to slow down, month after month, confirmed by economic indicator after economic indicator. This smells like the cusp of a recession, pre-recession, or a recession. The numbers don’t lie.

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Why Did the Federal Reserve Injected 88.1 Billion Dollars in the US Economy?

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