Odd Lots Lots More with Joe Abate on the Fed's New Target and the Rising Price of Money
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Oct 3, 2025 Joe Abate, head of macro strategy at SMBC Nikko and former bank analyst, dives into the Fed's evolving policies. He discusses the shift from a scarce-reserve to an abundant-reserve framework, highlighting its impact on the Fed funds market. Abate explores Lorie Logan's proposal for a new target rate, potentially moving toward tri-party repo. He also addresses the rising costs of liquidity, the implications of a large Fed balance sheet, and how stablecoins could influence short-term markets. Tune in for fresh insights on the changing landscape of finance!
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Reserve Regime Shift Changed Fed Mechanics
- The Fed moved from a scarce-reserve to an ample-reserve regime after 2008, changing how it controls short-term rates.
- In ample reserves, banks trade less in the fed funds market and the market becomes an arbitrage between distinct lenders and borrowers.
Fed Funds Became An Arbitrage Market
- With abundant reserves banks stopped borrowing in fed funds and the market turned into an interest-rate arbitrage between specific lender and borrower types.
- That arbitrage kept the fed funds-IOER spread stable around roughly -7 basis points recently.
Plumbing Matters For Communication And Transmission
- The Fed needs a market barometer to communicate policy and to see how liquidity transmits to bank deposit and mortgage rates.
- Overnight rates form the foundation for term yields plus risk premiums, linking communication and transmission.