Fed Funds Futures Quotes

As I saw it, there was a 75 percent chance the Fed’s efforts would fall short and the economy would move into failure; a 20 percent chance it would initially succeed at stimulating the economy but still ultimately fail; and a 5 percent chance it would provide enough stimulus to save the economy but trigger hyperinflation. To hedge against the worst possibilities, I bought gold and T-bill futures as a spread against eurodollars, which was a limited-risk way of betting on credit problems increasing. I was dead wrong. After a delay, the economy responded to the Fed’s efforts, rebounding in a noninflationary way. In other words, inflation fell while growth accelerated. The stock market began a big bull run, and over the next eighteen years the U.S. economy enjoyed the greatest noninflationary growth period in its history. How was that possible? Eventually, I figured it out. As money poured out of these borrower countries and into the U.S., it changed everything. It drove the dollar up, which produced deflationary pressures in the U.S., which allowed the Fed to ease interest rates without raising inflation. This fueled a boom. The banks were protected both because the Federal Reserve loaned them cash and the creditors’ committees and international financial restructuring organizations such as the International Monetary Fund (IMF) and the Bank for International Settlements arranged things so that the debtor nations could pay their debt service from new loans. That way everyone could pretend everything was fine and write down those loans over many years. My experience over this period was like a series of blows to the head with a baseball bat. Being so wrong—and especially so publicly wrong—was incredibly humbling and cost me just about everything I had built at Bridgewater. I saw that I had been an arrogant jerk who was totally confident in a totally incorrect view. So there I was after eight years in business, with nothing to show for it. Though I’d been right much more than I’d been wrong, I was all the way back to square one.

On September 12, in a report to the British parliament, Mervyn, without naming names, sharply criticized the ECB and the Fed. “The provision of such liquidity support . . . encourages excessive risk-taking, and sows the seeds of future financial crises,” he wrote. In other words, there would be no Bank of England put. Mervyn’s concern explained why the Bank of England had not joined the ECB and the Swiss National Bank in proposing currency swap agreements with the Fed. By the time of our September 18 announcement, however, Mervyn appeared to have changed his mind. On the day after our meeting, the Bank of England for the first time announced it would inject longer-term funds (10 billion pounds, or roughly $20 billion, at a three-month term) into British money markets. Later in the crisis I observed, “There are no atheists in foxholes or ideologues in a financial crisis.” Mervyn had joined his fellow central bankers in the foxhole.

In retrospect, I think our view of market expectations was too dependent on our survey of securities dealers. Futures markets gave us a reliable read of where markets thought the federal funds rate was going—but not for our securities purchases. For that, economists at the New York Fed asked their counterparts at the securities firms, who paid careful attention to every nuance of Fed policymakers’ public statements. In effect, our PhD economists surveyed their PhD economists. It was a little like looking in a mirror. It didn’t tell us what the rank-and-file traders were thinking. Many traders, apparently, didn’t pay much attention to their economists and were betting our purchases would continue more or less indefinitely. Some called it “QE-ternity” or “QE-infinity.” Their assumption was unreasonable and entirely inconsistent with what we had been saying. Nevertheless, some investors had evidently established market positions based on it. Now, like Metternich, they looked at our statements about securities purchases and asked, “What do they mean by that?” Their conclusion, despite the plain meaning of what I said at the press conference, was that we were signaling an earlier increase in our federal funds rate target. They sold their Treasury securities and mortgage-backed securities, driving up long-term interest rates.

Beginning in 2001, there was another shift in the Repo market. The CFTC changed their margin investment rules, allowing for FCMs (Futures Commission Merchants) to invest their cash in federal agencies, municipal bonds, and corporate bonds, instead of just Treasurys. The premium that U.S. Treasury collateral enjoyed narrowed. Before the rule change in 2000, GC was averaging around 7 basis points below fed funds. Beginning in 2001, GC was averaging almost flat to fed funds. When there’s less demand for Treasurys, there’s a smaller premium.