The Fed Funds rate began trading as a lend/ borrow money market instrument in the 1920s under Call Rates or Broker Call rates. Loans were collateralized by stocks and bonds and arranged on the New York Stock Exchange floor by security dealers to cover customer securities held in margin accounts.
Margins in the 1920s were 10% which implied a customer could own 100 shares of stock for 10 cents on the dollar, while 90% of the purchase required brokers to finance through banks.
Money markets for lending and borrowing grew and became active day to day; therefore; banks began trading for funds between each other and between Federal districts by the middle 1920s. A bank with a surplus loaned overnight to a bank with a deficit to balance end-of-day bank books. David C. Wheelock, in a recent paper, estimates trading volumes from $100 to $250 million.
The question to ease or tight money conditions referred to the availability of loans, Call Money rates, and Fed reserves.
Nov. 10, 1920
A typical newspaper story about markets and reference to Call Money and Money Markets appeared as follows.
Call Money traded yearly highs at 25% to 6% lows. On Nov. 10, highs traded at 10%, lows at 9%, and a renewal rate to continue the loan at 9%.
Clearing House Exchanges balances were $938,987,775 vs. $75,468,493. Sub Treasury debit balances: $1,014,895. Fed Credit balances: $62,733,891.
The Fed withdrew from markets and banks on this day $9,000,000. Total Government deposits: $15,000,000.
Fed Funds Averages and Targets
Median averages for 31 years of monthly averages or 372 months run from 0.09 to 1.75. Data dates to 1992, and Fed Funds trade daily at 4.33.
Fed Funds trades massively overbought from averages 1 to 26-year monthly averages. Since 2016 and all past Fed Funds reports, Fed Funds traded overbought in every article from 1 to 12 and 15-year monthly averages. The difference today is Fed Funds are much higher, and mandatory to add extra months to find the Fed Funds rate average.
Averages from 26 to 31 years are actually in good shape and oversold. The overall range is located from 1.69 to 6.95 and 6.98. The 70% Confidence interval is located at 5.65 and 7.85 at the 90% mark. The larger context to 7.85 is that a line at 9.57 reigns supreme against all interest rate activity today, and this line will begin a slow descent over the next few years.
The Fed from projection reports factors Fed Funds at 5.1 for 2023 or a range from 5.13 to 5.37, then 4.1 for 2024 and 3.1 for 2025. The longer run past 2025 forecasts 2.62 to 2.31. Fed Funds from current 4.33 to 5.1 to 5.37 informs at least 70 points or approximately 50 points to raises remain available. A 100-point raise places Fed Funds at roughly 5.33 and inside the Fed’s range.
Fed Funds' first significant break is at 3.29 and within a 3-point range. Averages from the 31 years are at 2.6302, 2.6026, 2.5880, and 2.3362. Fed Funds will remain trading above 31-year monthly averages for at least 2 – 3 years.
Targets from 3.29 are located at 6.44, 4.81, 4.71, 3.19, 2.80, 1.85, and 1.57.
Neutral Rate
2.6302 minus 7.1% Inflation factors the neutral rate at 2.55 or 1.2 minus the ten-year yields. Either way, the neutral rate is viewed, the economic scenario factors as lower GDP, higher unemployment, and Inflation no change or slow crawl lower.
The Core PCE, or the Personal Consumption Expenditure, recorded 4.77 for November and just above Fed Funds at 4.33.
