Conventional Notions of the Neutral Rate and Term Spreads Are Upended

The conventional wisdom regarding the evolution of short-term interest rates and long-term bond spreads is being challenged by some high profile economists in a recently published NBER working paper, with potentially significant implications for both monetary policy and term structure dynamics. Using a newly constructed dataset of short-maturity interest rates that spans over 200 years, the authors reassess very long run trends in the neutral rate of interest, commonly referred to as r*, and decomposition of the term premia. Among their conclusions (edited for brevity) are that:

• “Short-maturity rates have secularly fallen faster than long-maturity rates -- resulting in clear evidence of secularly rising term spreads. This is contrary to consensus literature that focused on falling term spreads over the recent decades in context of the ‘great moderation’ and falling inflation volatility.”
• “In order to jointly match long-run patterns in inflation volatility and term spreads, important qualifications in the existing literature are required: either term premia remain a close approximation of sovereign default risk and that risk has in fact risen; or else, factors other than default risk are long-run determinants of term premia time variation – plausibly liquidity factors.”

Among my own conclusions (assuming my understanding of the paper is correct, and no guarantees that’s the case) are that:  

• Their analysis indicates the long run mean for r*, the neutral real rate of interest, is about 1.25% (see Figure A.1 below, excerpted from the paper, page 41 of 56). Presuming a scenario where inflation is near the Fed’s 2.00% target, that would imply the neutral Fed funds rate is about 3.25%. 

• Full disclosure: I’ve long been a bit wary of both the usefulness of the term premium concept and the robustness of its calculation given the wide variation in model estimates, once famously (I flatter myself) calling it the flux capacitor of term structure theory. Common defenses of the term premium are roughly that “the levels of the model estimates may vary widely, but they’re all showing the same trend and that’s what you need to focus on.” Not sure how this latest challenge of the conventional methods will fit into the whole theory, but it’s not putting a dent in my skepticism as of yet. Hawking radiation this is not. 

For complete discussion, see the new working paper from the National Bureau of Economic Research (NBER), Rethinking Short-Term Real Interest Rates and Term Spreads Using Very Long-Run Data, by Rogoff, Rossi and Schmelzing, published October 29, 2024.

Refresher Definitions and Concepts

r* or r-star – the natural or neutral short-term rate of interest that neither stimulates nor restricts economic growth when the economy is at full employment. It follows that r* should be the target of the primary monetary policy rate, which in the US is the overnight fed funds rate, when the economy is in equilibrium. 

• The Fed should set the funds rate above r* to cool the economy and lower inflation, and set it below r* to stimulate the economy and combat deflation. 
• The neutral rate is not directly observable and economists use models to estimate it. It is considered to be an underlying characteristic of the economy and may fluctuate over time. 

Term spread – the difference in yield between two points on a yield curve, conventionally calculated as the longer-term minus the shorter-term yield. 

• For example, if the overnight (O/N) fed funds rate is 2.00% and the 10-year Treasury (10yT) rate is 5.00%, the term spread between the O/N and 10yT rate is 3.00% or 300 bp (spread = 5.00% - 2.00%). 

Term structure – the term spreads across the curve calculated against a fixed point, typically using e.g. the O/N fed funds or the 3-month T-bill rate as the short-term rate. 

Term premia – Standard finance theory posits that long term yields can be separated into two components: expectations of short-term rates over the same time period plus a term premium. A simplistic calculation decomposing the yield on the 10-year Treasury can be written as:

Yield on 10yT = Avg expected T-bill yields over next 10 years + Term premium

Unfortunately, neither of the components of the nominal yield can be directly observed, so each must be estimated.

• The interest rate expectations component can be estimated via surveys or forecasted through the use of term structure models. This component is often further separated into two parts: 

• Average expected future short-term real interest rates, plus 
• Average expected inflation until the bond matures.

• The term (or risk) premium component is the additional compensation that risk-averse investors require for holding longer-maturity bonds instead of rolling short-term securities. This can be estimated using joint macroeconomic and term structure models. Several popular models also split the term premium into two parts:
• The real risk premium which is the compensation investors require to bear risk associated with variable future short-term interest rates, and 
• The inflation risk premium which reflects the uncertainty of future inflation. 

Evolution of term premia estimation 

A variety of models have cropped up over the decades to estimate the term premium. The methodology of the models and the estimates tend to vary widely. 

For an excellent overview of the term premia and several models used to estimate it, see the BIS article, Term premia: models and some stylized facts from 2018. An example of four different model estimates of the 10yT term premium, and the decomposition of the 10T nominal yield into 2 components using one of the models, is excerpted below. 

The variation in the expectations component among the 4 models is also shown (left hand graph below), along with a complete decomposition of the 10-year yield using the Hordahl and Tristani joint macroeconomic and term structure model (right hand graph, below).

Updated estimates through 2024 of the term premium for the 10yT using the four most popular models currently continue to vary widely, from slightly negative to over 150 bp. See Will the True Treasury Term Premium Please Stand Up, for further details. 

The Cultural Jumbotron

It's difficult to overstate the dramatic irony of watching Buffy the Vampire Slayer for the first time post the MeToo awakening; post Joss Whedon's "cancellation" and his cringe-inducing, if possibly more damning attempt at rehabilitation. It's jarring to read through some of the fervent, idolatrous praise lavished upon Whedon for decades, while watching the character of Xander - the self-insert for Joss, and supposed everyman persona - speak and act in a way that relentlessly sexualizes, undermines, and belittles every strong female on the show. You know, the joking, dork best friend who you realize looking back was neither joking nor a friend. 

Despite the raging insecurity and misogyny of its creator, often reflected in the characters, it's truly brilliant. The vampire show about what a horror it is to be a teenager in high school. BtVS was one of the first TV shows that struck academics, critics and fans as being worthy of study in the same way literature is studied. Star Trek the Next Generation was another, and both are absolutely deserving of all the acclaim. I don't know anything about show running, writers rooms for TV series or movies, and how much is teamwork versus personal vision. Two of the most ground-breaking episodes of television that I've ever seen are "Hush" and "Once More, With Feeling" in BtVS, and both of them were written and directed by Joss Whedon. 

As probably everyone knew but me until recently, among his many stratospherically successful projects after BtVS, Whedon went on to write and direct several of the Marvel movies. I'm not a Marvel fan and I typically avoid the comic book, superhero genre (apologies to Ellen, one of my besties and a perfect SuperGirl at ComicCons). He also co-wrote Toy Story. In a stroke of all-around genius, it was Joss' idea to transform Buzz into a character who doesn't know he's a toy. The writing is inventive, kind hearted, and so off-beat funny (for Gen-Xers in particular, because we owned and played with all those toys) that it mainlines childhood nostalgia in the same way A Christmas Story did for my Dad. 

On the flip side, Whedon also wrote Alien: Resurrection. As a spooky scifi fan, Alien and Aliens are two of my top 10 movies of all time. Buffy the Vampire Slayer is now in my top 3 TV shows of all time. But Alien: Resurrection is hot, vulgar, misogynistic garbage that got a lot of credit for not being as horrid as Alien 3. FYI that bar is so low that a fat dachshund could clear it. It takes all the bad, disturbing vibes in BtVS and puts them in a grown-up monster movie that's mean to both the heroines and the female alien.  

Sidebar: my Dad grew up in Hammond, Indiana, in the same neighborhood, went to the same high school as Jean Shepherd, and owned all of his books. He was a decade or so younger, but that movie literally was his childhood, down to the furnace clinkers, the department store line to see Santa, and the double dog dares on the playground. 

Similarly, when I first watched and fell in love with Stranger Things, I couldn't figure out exactly why it resonated with me so much. It wasn't just the time period, but they managed to perfectly capture the feeling and environment of growing up in that era. Then I found out the Duffer brothers grew up in Durham, NC. When I turned on the closed captioning (don't laugh, you'll do it too one day and you'll never turn it off) I realized that several of the places they reference - including Lochnora where the Wheelers live, and the location of Mirkwood at the intersection of Kerley and Cornwallis - were actually in my neighborhood. I grew up in Winston-Salem, but Durham has been my second home for decades. I used to own a house on Kerley Road about 1/4 mile beyond the intersection with Cornwallis, which dead ends into Lochnora about a mile away. The show itself is set in the fictional town of Hawkins, Indiana, which may as well be a stand in for Greencastle, Indiana, where I went to college (all hail DePauw, go Tigers!). 

I think Buffy the Vampire Slayer may be a cultural touchstone for millenials. It serves as a near perfect reflection of their experiences in high school into young adulthood, in relationships, in friendships and with authority figures. People who grew up in southern California may also agree they nailed the environment and ethos of that community. Which is why, I think, that the rabid defenders of Joss Whedon and the series couldn't quite see the misogyny and toxic "normalized" relationships that were being depicted onscreen at the time. It requires distance and perhaps a bit of wisdom that comes with age to look back at something and realize it was kind of screwed up. 

I am forever grateful that my life or career doesn't get replayed on the Jumbotron. I can't imagine being an athlete, an actor, a musician or a celebrity of any field where my development, triumphs and mistakes are memorialized for the pundits of the world to pick apart. The downside of having such a rabid following is that Buffy fans practically dictated the direction of the show at times. Two notable casualties: 

• Riley, played by Marc Blucas (former Wake Forest basketball player!), had the unenviable task of being Buffy's first love interest post Angel. The character and the actor were deemed boring and unworthy by the (heavily teenage girl) fanbase, and ended up leaving the show after little more than a season, despite exceptional support from the writers and Joss himself. Note to fans everywhere: first, give some grace to people who have to perform in front of an audience as they hone their craft; second, what about crazy hot, military, "corn fed Iowa" boys do you not like? And he was both funny as heck and painfully vulnerable when he was squaring off with Angel and Spike. Good luck Marc, I hope you've found a better base. 
• On the upside, Charisma Carpenter's character of Coredelia was written as vapid and shallow throughout the first few seasons, and of course she hooks up with Xander the dweeb (hello, Joss, how many fantasies were you actually living out?). Despite being one of the most uncharitably written characters I've seen in a major series, she became popular enough to be moved over to the Angel spinoff, which is a testament to her acting and audience appeal. Until Joss sexually harassed her out of a job. Though I did listen to a podcast with James Marsters who stated she was cut when he was brought onto the Angel series because they couldn't afford both of them. James seems like a stand-up guy, but it was hard to hear, particularly in light of everything that has since been disclosed. Go be a bad ass, Charisma. You deserve all the love. 

So far I've made it through the middle of Season 6, where Buffy and Spike are hooking up. Not sure how much more I'm going to watch. Not because it's gotten bad, but because Buffy is so depressed and gloomy that it's dragging me down. Also, I love Tara and Willow and I know what's coming and don't want to go through it. 

Thanks, Joss and everyone who worked on the show. Even 25-ish years on, despite all the controversy and issues, it stands as a phenomena that changed the way we all view television. 

Building a Yacht in the Shire

The Wall Street Journal's mansion of the week is another ode to ostentatious wealth colliding with whimsical, undisciplined design. Let's tick off the obligatory story lines first:

• The owners bought the land for $2.8 million in 2011. It's 60 acres outside of Cleveland in the "wealthy village" of Hunting Valley, OH on the Chagrin River. 
• The owner founded his own business, which was bought by Blackstone in 2017, and the estate was developed in 2018 at the cost of $20 million. 
  
• The husband unfortunately passed away in 2021 at 63 years old, and his wife is selling the house and building another house elsewhere. 
• The state record for a home sale in Ohio is $10 million, and this house is asking $20 million. 

The lead picture in the WSJ article is an aerial shot of the house from the back. 

My first reaction was "holy cow, did you hire an architect and if so, did they hate your guts?" The house moves from a rhythmic, charming, predominantly shingle style* home on the right, to a disorganized blob of masses on the left with a jumble of competing roof lines. 

The Zillow listing for the home has many more pictures, is better organized, and leads with a view that flatters the home, making it look integrated and cohesive. I suspect some of the rooms on the side were expanded or included as late additions, which might be why they appear a bit haphazard in the overall design. 

*The shingle style of architecture is uniquely American. It first developed in coastal areas of New England in the mid 19th century, then migrated across the country and abroad. Shingle style houses tend to be wonderfully asymmetric, often incorporating round or polygonal towers, wide porches, a variety of windows and rooflines. Balancing such elements into a cohesive, well flowing design requires both exceptional creativity, a keen sense of proportion and balance, and disciplined restraint. 

After leading with aerial shot from the back of the house, the WSJ story follows with two pictures of the man cave - a home barbershop and the golf simulator. 

Why anyone wants or needs a 20,000 square foot home is beyond me, but as foreshadowed in the first picture, we are about to dive into 20,000 square feet of nearly relentless, joyless, busy brown. Punctuated by a few rooms of equally overbearing combinations of gray. I wish I were kidding. 

There are some gorgeous mosaics throughout the home. This is probably my favorite room, which is a shame because it's likely among the least used. But it's stunning. I'm not sure why there are zippers on the dining room chairs. Are they designed by Tom Ford? That's one of his signatures, though I'm not sure he does a home furnishings line. Is it risque to unzip them? I never get invited to those dinner parties. 

If you look through the pictures the quality of the materials and craftsmanship is impressive. The quirks come from stuff like this:

Mini rant: I hate vessel sinks. They're difficult to clean around, the water splashes straight up at you when you turn it on, and while I'm all for some personal touches, this looks like a hat for one of the Daleks in Doctor Who. Also, if you've never renovated or built a house, let me tell you that putting the plumbing fixtures on the wall AND mounted to / through the mirror is abominably expensive. I bet their plumber bought an AirStream after they finished that house. 

But this has to be the funniest room. When I saw it, I immediately thought "Bilbo Baggins goes on a Carnival Cruise". Swear to god. Then I read the house listing on Zillow, which mentions that the interior designer is a World Renowned (their capitalization, and ... stop it) yacht interior designer. Again, the craftsmanship, the proportions, the design is gorgeous. For me, it's just too much of everything. 

I adore many styles of architecture and design. In my own space I tolerate very little visual movement and veer towards minimalism. My cabinets had to be changed from natural birch to white oak at the last minute, and I'm still struggling to deal with how much color and visual distraction they add, which I wasn't prepared for. 

The natural pools connected by the waterfall and stream in the back of the house are beautiful, and absolutely my favorite feature of the property. I hope they had big, joyous, coon hounds who splashed into the pool and chased deer everywhere. My dream is to be able to add a wildlife pond at my house, install a camera and see who shows up.

A Layperson's FAQ on Chevron Deference

Between Supreme Court decisions and the presidential debate, it's been an exciting few days. Predictably, nowhere has the reaction to these events been more unhinged than on Twitter. My own feed is dominated by dog Twitter, the internet hall of fame, and the comic genius behind the Oklahoma Department of Wildlife Conservation account (who just announced she is moving on, breaking the hearts of tens of thousands of her devoted fans). Still, some law content leaks in because I'm a closet SCOTUS (Supreme Court of the United States) junkie, and it's been ... what's the opposite of enlightening? 

So here we go, a layperson's FAQ on Chevron deference. The usual caveat applies: I am not a lawyer, I have never been to law school, and any mistakes or misunderstandings are entirely my own. 

What was the recent SCOTUS decision?

In what was arguably the most consequential decision to date of the current term, the court ruled in Loper Bright v Raimondo to overturn the Chevron doctrine, in a 6-3 vote along ideological lines. This doctrine, also referred to as Chevron deference, was a standard established by SCOTUS forty years ago in their opinion to Chevron v Natural Resources Defense Council (1984).  

Yeah, so far that's not helping

Three branches of government: legislative, executive and judicial. 

The legislative branch (Congress) writes laws and federal statutes. Congress also creates administrative agencies that are granted the authority to implement and enforce these statutes. 

The agencies, whose heads and executives are appointed by the executive branch (White House), interpret the statutes to write rules, regulations, conduct enforcement and impose penalties for violations of the laws and statutes. 

The Administrative Procedures Act (APA), which Congress enacted in 1946, "serves as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation." The APA gives the judicial branch a role in policing the statutory boundaries. Federal courts are directed to "set aside agency action" that is "not in accordance with law" or "in excess of statutory jurisdiction, authority or limitations". 

Ok, School House Rock. What was Chevron deference?

Chevron was a doctrine, created by SCOTUS in their 1984 opinion, that outlined a two-step framework for determining whether or not the court should apply its own interpretation of a statute, or defer to the agencies' interpretation, when the agencies' scope of authority or interpretation is challenged through litigation. 

From Chevron Deference: A Primer (2023) by the fiercely nonpartisan Congressional Research Service (excerpts from page 2 of 35, edited for brevity, emphasis added): 

When Congress delegates regulatory functions to an administrative agency, that agency’s ability to act is governed by the statutes that authorize it to carry out these delegated tasks. In the course of its work, an agency must interpret these statutory authorizations to determine what it must do under the statute and what it may do within the limits that Congress has set. When agencies act pursuant to those interpretations, the scope of their statutory authority is sometimes tested through litigation. Courts that review challenges to agency actions may give special consideration to agencies’ interpretations, particularly of the statutes they administer. This special consideration is known as “deference.” Whether and when courts should defer to an agency’s interpretation of a federal statute, rather than apply the court’s own interpretation, are critical questions in administrative law and judicial review of agency action. 

The Chevron framework of review usually applies if Congress has given an agency the general authority to make rules with the force of law. Within that framework, Chevron often requires courts to accept the statutory interpretations that underlie the agency’s implementation of that general authority. Where a statute is susceptible to multiple reasonable interpretations, the Chevron framework requires courts to defer to an agency’s reasonable interpretation of the statute. The Chevron framework, accordingly, shifts interpretive authority from the federal courts to agencies in certain circumstances. 

 

If Congress has delegated authority to the agency to decide a question—that is, if Chevron applies—a court asks at step one whether Congress directly addressed the precise issue before the court, using traditional tools of statutory construction. If the statute is clear on its face with respect to the issue before the court, the court must implement Congress’s stated intent.

 

If a statute is silent or ambiguous with respect to the specific issue, the court then proceeds to Chevron’s second step. At step two, courts must defer to an agency’s reasonable interpretation of the statute. Courts employ a variety of tools to determine whether an agency’s interpretation is reasonable, including some of the same interpretative tools used in the step one analysis. 

The Primer is outstanding and worth reading in its entirety. 

Seems reasonable. What became problematic? 

Over time using the Chevron framework became messy. From the Primer:

Application of the Chevron doctrine in practice has become increasingly complex. Courts and scholars alike debate which types of agency interpretations are entitled to Chevron deference, what interpretive tools courts should use to determine whether a statute is clear or ambiguous, and how closely courts should scrutinize agency interpretations for reasonableness. A number of judges and legal commentators have even questioned whether Chevron should be overruled entirely. 

In later decisions SCOTUS modified it, blurred it, side-stepped it and created exceptions to it. Still, it was heavily utilized for about 40 years and has been cited in 18,000 opinions across all federal courts (see here and here). However, SCOTUS itself hasn't utilized the Chevron doctrine in a decision since 2016. Legal scholars and court watchers have long referred to Chevron as a zombie precedent, with Justices Alito and Gorsuch stating outright in comments from 2022 that it should be overruled (see the Primer, pages 20-21 of 35). 

Part of the complexity was because government agencies, typically at the direction of the executive branch, also began to write new rules, or (at times wildly) broaden interpretations of their authority in a way that took advantage of a statute being "silent or ambiguous" with respect to an issue. In certain cases an agency's rules and interpretations would change with each turnover in the executive branch. 

I'm shocked! The administrative state = the deep state? 

That's certainly what all the celebrations and hysteria on Twitter would lead one to believe. There's a good article on The Verge here that summarizes some possible areas of impact now that Chevron has been overturned. They mention:

• The FCC's regulations covering broadband and net neutrality; 
• The EPA's rules for carbon emissions and greenhouse gases, and 
• The FTC's regulation of big technology companies. 

It's worth noting that despite the "OMG this is such a power grab by SCOTUS" statements at the beginning, most of the experts that they cite in each case state that Chevron has been dead for some time and the court has migrated to using the Major Questions Doctrine as its standard for adjudicating similar questions of statutory interpretation. 

The what? And this better be short because I'm running on fumes.

As SCOTUS found the Chevron framework problematic, it began to augment or replace it with what is now referred to as the Major Questions Doctrine. From the Congressional Research Service primers for both Chevron and Major Questions:

Under the Major Questions doctrine, the Court has sometimes declined to defer to an agency interpretation under Chevron in “extraordinary cases” that present an interpretive question of great “economic and political significance.”

Applications of the doctrine rest on a determination by the Court that one of the core assumptions underlying Chevron deference—that Congress intended the agency to resolve the statutory ambiguity—is no longer tenable. Where major questions are at stake, the Court has said, “there may be reason to hesitate before concluding that Congress ... intended” to delegate resolution of that question to the agency. The Court’s hesitation is reflected in survey data of congressional staffers. Of the 137 staffers surveyed, 60% responded that drafters intended Congress—not agencies—to resolve major questions.

In several recent decisions, the Court has placed increasing emphasis on the major questions doctrine. First, in Alabama Association of Realtors v. HHS, the Court explained that the CDC’s eviction moratorium was of major national significance and required a clear statutory basis because the agency’s action covered 80% or more of the nation; created an estimated economic impact of tens of billions of dollars; and interfered with the landlord-tenant relationship, which the Court explained is “the particular domain of state law.” Then, in National Federation of Independent Business v. OSHA, the Court considered OSHA’s emergency temporary standard (editor: requiring that workers be vaccinated against Covid-19) to be of major economic and political significance because, in its estimation, it seriously intruded upon the lives of more than 80 million people.

Most recently, the Court’s decision in West Virginia v. EPA marked the first express reference to the major questions doctrine in a majority opinion of the Supreme Court. In West Virginia, the Court rejected EPA’s reliance on a statutory provision that, in the Court’s view, was a “previously little-used backwater.” The Court concluded that it was unlikely Congress would task EPA with “balancing the many vital considerations of national policy implicated in deciding how Americans will get their energy,” such as deciding the optimal mix of energy sources nationwide over time and identifying an acceptable level of energy price increases. For more information on the case, see CRS Legal Sidebar LSB10791, Supreme Court Addresses Major Questions Doctrine and EPA’s Regulation of Greenhouse Gas Emissions, by Kate R. Bowers. 

All of the cases cited above were ones where the government agencies arguably went well beyond their statutory power to undertake actions at the direction of the executive branch. 

What are the takeaways? 

Chevron has been a zombie precedent for close to a decade. Legal scholars, experts and serious court watchers have been expecting this for awhile. Depending on ideology, this can be interpreted as a shift back towards more balanced judiciary oversight of the executive and administrative branch, an exhortation for the legislative branch to start writing less ambiguous and clearly defined statutes, or "a massive power grab" by the Supreme Court. Over time it could have significant ramifications for how these cases are decided, particularly in lower courts, but that's been underway for several years. 

Hysteria aside - and there's been a lot of it - Chevron being overturned will probably stand as the most consequential decision of this term*. 

*The presidential immunity decision is tomorrow. And then come the fireworks! Har har. 

Only Rants

Instead of restarting this blog, which has long focused on finance related topics, I briefly considered starting a new blog and calling it "Only Rants". The title was catchy, though admittedly stolen from my nephew Rand, who at one time considered calling his college football blog "Only Rands". It also implied articles that were grouchy with a twinge of inappropriate, which *points to self* seemed to be on brand. But I finally decided against it for several reasons. Although I will no doubt include occasional spirited content, I want to focus on constructive analysis and ideas more than complaints. I  also worried about the side traffic and judgement that name might attract and I'm not dealing with that. 

However, it's Sunday afternoon and I can't resist a post of random rants. Serious, thoughtful, mind-stretching topics are for weekdays. 

Quick Hint Rants

So boring I'm waiting for your scenes to be over  

Typically this is a combination of the part or scene being badly written, the character under developed, and the actor not finding a way to overcome the deficits with more nuanced acting. 

• Zendaya in Dune Part II - The character isn't interesting, which is entirely the fault of the writers. Zendaya is not particularly convincing that she feels anything other than annoyance, and perhaps jealousy, towards Paul. The pouting and stomping off towards the end comes across as childish, which I hate, because if she's supposed to be strong and powerful, make her exit powerful and principled, not kind of pathetic. 

• Francesca in Bridgerton, Season 3 - I know the point of her love story is that it's not all fireworks and lust (at least not for her husband, haha), but the character and the actor are so flat that it's impossible to care what happens. So far these were the only scenes in three seasons that I fast forwarded through so I wouldn't have to watch her smile wanly. 

Badly miscast and it's still bugging me

• Peeta in Hunger Games and Tom Cruise as Jack Reacher - Just, no. In the books Peeta is big, strong and physically intimidating. Jack Reacher is a former military, Rambo type with the size and build of my ex-husband (6'6", long ape arms, makes anyone think twice about messing with him). As actors both of them are fine, but the characters size and physicality is an integral part of the stories. Josh Hutcherson is 5' 5" and looks like Jennifer Lawrence could beat him in a bar fight. I still enjoy the movies and he does a fine job, but it nags at me that I can't get past his description in the book, which is absolutely a limitation of mine. Tom Cruise casting himself as Jack Reacher was pure hubris and thank god they've redone the series with an actor who is actually believable in the part. 

• Dana Delaney in Tombstone - Tombstone is one of my favorite movies. It has the holy grail of male actors: Val Kilmer (he should have won the Oscar for this performance), Kurt Russell, Sam Elliott and Bill Paxton in the leads. Michael Biehn, who I worship from his turns as Reese in Terminator and Hicks in Aliens, also plays Johnny Ringo. I suspect some of Ringo's scenes ended up on the cutting room floor, because despite a strong performance, the character doesn't feel as fully developed as some of the others. Wyatt's wife, Mattie, has a small, underwritten part (women in a western, duh) but Dana Wheeler still manages a scene stealing performance. I can't put my finger on what bothers me about Dana Delaney's portrayal, but she looks and feels out of sync with the rest of the cast. It's almost as if her performance is modern and everyone else is sticking to old west period acting. It doesn't ruin the movie by a long shot, but it's an out of tune note in an otherwise wonderfully harmonious ensemble. 

No one has a photographic memory

Good Will Hunting was total nonsense. So was Suits. All of the (invariably male) Hollywood written genius characters, astonishing people with near instant recall, reciting limitless passages verbatim because they "have a photographic memory" for ostensibly the library in their heads. It's bunk. 

Scientists have studied and tested this for decades. People who claim to have photographic memories are invariably incorrect or lying. Those closest to having photographic memories tend to recall events or visual information with exceptional detail accurately, not written information. 

Of course there are people with exceptional memories (of whom I am deeply jealous); and many more who build, flex and improve their storage and recall of information with practice. The sheer amount of information that you have to memorize and retain to make it through medical school convinced me I could never be a doctor. Well, that and I can't stand being around sick* people. "Be a pathologist!" *or dead people. 

Jobs I Should Have

 I am currently, as they say, "between jobs", and have been giving some serious and some not at all serious thought to work that I am particularly well suited to do. These are my not at all serious thoughts, in that no one would hire me to do these jobs, and some of these jobs don't technically exist, but I believe they should and that I might be the best person to do them. 

1. Editor for the Harry Potter book series

JK Rowling is an amazing story teller. The language she uses is inventive, the worlds she creates are truly magical and immersive, and she does an exceptional job developing her characters as they mature from middle school through young adulthood. 

JK Rowling is not the best writer. I gave up on reading the books about midway through Goblet of Fire because OMG she just blabbers on and on. She indulges in 50 page tangents and background about characters that go nowhere and don't enhance the story line. Her sentence structures at times are chaotic. Much like Stephen King, she tends to fall back on tropes throughout the series, some of her own creation and some that are exhaustingly stereotypical, particularly in the doofus persona of Ron and the brilliant bookworm Hermione. 

The excessiveness needs editing down, the sentence structures could be tightened up in areas, and some material needs to either be pushed into other standalone books or simply dropped. If you've ever read an interview of Jodie Foster, they can be mind numbing because the woman seems to never shut up. She is wildly successful, her career is productive and challenging, and yet she's so enchanted by her own persona that its off putting. In some limited aspects JK's writing strikes me that way. It's a weird sort of narcissism not to temper your own thoughts, writings or production, as if restraint were only for the less accomplished. 

My most significant gripe with the storytelling itself - not the job of an editor, but I'm going to mention it anyway - is that she repeatedly kills off characters either to seemingly manufacture drama or because she doesn't know what to do with them and wants to focus on new ones. And then she introduces new ones and kills them off too. The stories are fabulous and they follow wonderful arcs. But take a lesson from Tolkien and keep most of the good guys alive. Don't ask your readers to invest deeply in a multitude of characters that you gradually exterminate to presumably reinforce your main characters isolation. That's a bit cheap. 

2. Editor for the Harry Potter movies

Ok now I'm really mad. A badass female author who turned over her incredible stories to all male directors (and screenwriters, I believe), one of whom had never even read the books, and it SHOWED. Mike Newell, Goblet of Fire, by far the worst, most discombobulated movie of the series. He has been eviscerated in other reviews but he deserves it. What kind of arrogant jackalope even wants to direct a movie based on a book that he doesn't find interesting enough to read?  

The movies severely edit down the books, which of course they have to, and most of them do it exceptionally well. I would honestly love to see a Netflix series of the books that can be more expansive and include more storylines, like a Stranger Things style treatment. What bothers me is that Hermione is frequently made a nagging shrew in several of the movies, which to my limited knowledge she very much was not in the books. Include Women Directors, you freaking sexist jerks. 

Best movie of the series and arguably best book of the series: Prisoner of Azkaban. 

Best scene added by writers and director David Yates: where Harry and Hermione dance in the tent to 'O Childern' by Nick Cave, in Deathly Hallows part 1. Everyone seems to love that scene, it captures the deep friendship and intimate connection between Harry and Hermione, and it lifts the story out of the relentlessly, interminably bleak sequence (that I've heard lasts for 300 pages) in the book where nothing much happens. Ok, sorry, moving on. 

3. Dog chiropractor and masseuse 

This is my next career. Not kidding. I love dogs. I'm not a great dog trainer, though I plan on learning how to be a decent one. But helping dogs feel better, move better, relieve stress and pressure on their joints and muscles is definitely something I want to become outstanding at. 

4. Residential architecture and interior design critic

This is one of my favorite hobbies. Just ask my siblings, to whom I email house listings from Zillow, the Wall Street Journal real estate section, or links to various architecture or design sites along with many paragraphs of commentary that bores them silly. 

The reason I could never pursue architecture or design as an occupation is that I have laughably poor depth perception, seek out adult versions of garanimals because I can't match colors, put together complimentary patterns or styles, and although I'm trying, I have near zero ability to pull together a fashionable outfit much less a subtle, balanced, coordinated interior space. 

However, I've learned that TONS of people - including some builders and interior designers - are equally inept at these skills and have jobs doing them anyway, and I enjoy making fun of them. "Well Mary Beth, that's not very nice." Really? You're here so I assume we've met. 

The woman who writes the McMansion Hell blog is one of my personal heroes. She is an architecture expert and in addition to being hilarious, you learn things from her analysis about why some houses look like unbalanced battleships and others have the timeless grace of Biltmore House. 

Hat tip: the most atrocious houses in the Wall Street Journal real estate section are built by small business owners or builders who "have a passion for architecture" and the interiors were designed by (typically) their wives. Invariably it took the couple 7 years to build, they spent $7 to $20 million on the house, its a jumbled mess that often incorporates every overwrought design trend of the past 15 years, and they've lived there for 3 to 5 years and are now selling because "the kids are grown and our business increasingly takes us to Europe for several months of the year, so we're looking for a pied a terre in Paris." I would write the articles but I worry I couldn't sufficiently dampen a slight undertone of sarcasm. 

Those are some of the jobs I should have, while I continue looking for a job that I need, and am actually good at. Was this a TED talk? I honestly have never listened to one. 

Fed Projections for the Fed Funds Market Implies Additional Tightening

Earlier this week (on Tuesday, February 27, 2018) researchers at the Fed published a paper, inauspiciously titled A Model of the Federal Funds Market: Yesterday, Today and Tomorrow. The authors develop a quantitative model of the fed funds market –honestly one of the best and by far the most comprehensive that I’ve seen – and project changes in future trading volumes and levels of the fed funds rate. The dynamics are not based on the pace of fed funds rate hikes themselves, though they do assume hikes proceed along the Fed’s baseline. Instead, the model projects the level of the effective Fed funds rate relative to the target as the Fed undertakes policy normalization and aggregate outstanding reserves – excess cash in the banking system – are drained by the Fed, declining from roughly $2 trillion to $200 billion.

This reduction – or normalization - of the level of reserves is expected to gradually reshape the interbank market, raising the trading level of the effective fed funds rate above the upper bound of the fed funds target, due to increased trading volume and an increase in the number of participating banks. The return of bank trading activity will supplant the current domination of the fed funds market by the GSEs. These projections, if realized and supported by the FOMC as prudent policy, obviously have important implications for a variety of short term interest rates and spreads, including those for repo, overnight index swaps (OIS), Libor and its descendants, the overnight bank funding rate and commercial paper.

Key Takeaways

·         The authors project that large banks will return to lending in the fed funds market when the level of reserve balances falls to $900 billion.

·         At the current pace of policy normalization, reserve balances are expected to reach $900 billion in January of 2021. Fed projections of SOMA holdings and the level of reserve balances can be found here.

·         The baseline projection is that as total reserves pass through the $850 to $800 billion range, trading volume in fed funds increases and the effective fed funds (EFF) rate begins trading above the interest on reserves (IOR) rate, which is set at the upper end of the fed funds target range. This rise in the EFF rate relative to the target should happen in February / March of 2021 timeframe.

·         By December 2021, when aggregate reserves fall by another $400 billion, the model projects that the EFF rate will be sloping upwards to the midpoint between the upper bound of the FF target range and the discount window lending rate, which is set 50 basis points above the upper bound of the target.

·         That implies the EFF rate will float from 8 bps below the FF target to 25 bps above it, tightening short term interest rates by an additional ~33 bps as the Fed proceeds with policy normalization and reserve balances decline. This additional move higher in the EFF rate would presumably occur gradually throughout 2021.  

Excerpts from the paper

Caveat: I would strongly recommend reading the entire paper, as it is a terrific analysis and includes much more detail and nuance, as well as confidence intervals around their model projections, than I can cover here. Emphasis added.

For our main policy exercise we trace the evolution of the FF market as we reduce the aggregate supply of reserves from its current levels down to $200 billion Doing so requires us to specify the complete dynamics of the distribution of excess reserves across banks along the path, for which we have little more than an educated guess. For our baseline case we find that the banks with the largest balances return to lending funds at around $900 billion in total reserves, driving a resurgence in FF volume. Quite quickly the EFFR drifts above the IOR—somewhere between $800 billion and $850 billion—as bank-to-bank trades necessarily execute at rates above the IOR. This is an important event, as it marks the end of the current implementation framework that equates the IOR to the top of the target range for the EFFR. However, it takes about $400 billion less aggregate excess reserves for the EFFR to start sloping upward to the midpoint between the IOR and the discount-window rate—what would be the hallmark of a classic corridor system.

We find that the evolution of the FF market is quite sensitive to the dynamics of the distribution of excess reserves across banks. In particular, the extent to which the largest banks hoard reserves is crucial to determine when the EFFR crosses above the IOR. By varying the rate at which the banks with higher balances reduce them relative to those banks with lower balances, the EFFR first drifts above the IOR anywhere between $500 billion and $1.1 trillion. Of particular interest is the possibility that the largest banks plan to rely on reserves as high-quality liquid assets to satisfy regulations. If so, the distribution of reserves becomes more concentrated at the top, and mechanically there is a larger fraction of banks with low balances. This combination increases the gains of trade and leads the largest banks to lend funds at a higher level of aggregate reserves, driving the EFFR above the IOR much sooner than under the baseline.

Refresher on Fed’s Monetary Policy Rates

Secured lending to the Fed

Ø  Safest counterparty (the Fed) + safest collateral (Treasuries) = Lowest return on investment

Overnight Reverse Repurchase rate (ON RRP) – Interest rate offered by the Fed for overnight loans, with borrowed funds secured by Treasury collateral from the Fed’s SOMA portfolio. These borrowings of cash in exchange for collateral are categorized as open market operations by the Fed, and they temporarily drain reserves from the financial system. Eligible counterparties include primary dealers, banks, money market funds and the GSEs. The offering rate is set at the lower bound of the FF target range, though it can fluctuate in certain circumstances based on demand (see additional notes); currently 1.25%.

Borrowing unsecured in the US based interbank market, e.g. the Fed funds market

Ø  A US bank borrowing from another US bank or GSE, to meet the level of cash reserves depository institutions are required to hold in their accounts at the Fed. Roughly speaking, these required reserves are 10% of a bank’s transaction deposits.

Ø  Prior to QE and LSAPs the level of excess cash in the system was structurally low, so the Fed funds market was very active and liquid. The Fed conducted daily open market operations as a lender of cash to keep the effective interbank borrowing rate close to their Fed funds target rate. These were overnight and short term repurchase (repo) operations.

Ø  As the Fed normalizes monetary policy they will gradually reduce their portfolio of Treasury and agency securities, and will conduct reverse repo operations, both of which will drain excess cash reserves from the banking system.

Interest on Reserves (IOR) rate – Interest rate paid by the Fed to depository institutions for reserves held in their account at the Fed. Set at the upper bound of the target FF range; currently 1.50%.

Ø  Pointing out the obvious (because I’m great at it) – since a depository institution can leave their cash in their reserve account at the Fed and earn the IOR rate, there is no incentive for that bank to lend money to anyone at a lower rate.

Ø  The reverse is also true. If a bank can borrow funds from another institution at a rate below the IOR, they can park those funds in their account at the Fed and earn the difference. A nice risk-free arbitrage.

Ø  In theory the IOR sets a lower bound for unsecured interbank lending rates. In practice it’s imperfect, due to (a) regulatory charges imposed by the FDIC; and (b) the participation of the GSEs in the interbank market. The GSEs are not required to hold reserves at the Fed, so cannot earn the IOR rate on their excess cash.

Ø  The GSEs will therefore lend cash in the interbank market at rates below IOR, and banks will execute the arbitrage. In times of abundant reserves – post QE and LSAPs – these lending operations dominate the interbank market, pushing the effective Fed funds rate below the upper bound of the target.

Target Fed funds rate (FF) – Fed’s monetary policy target range for overnight interbank lending. Difference between lower and upper bound set at 25 basis points; target adjusted in 25 basis point increments (e.g. +/- 25 bps, +/- 50 bps); current FF target range is 1.25% to 1.50%.

Effective Fed funds rate (EFF) – Calculated as the volume weighted daily median borrowing rate where reserves actually trade in the US based interbank market. This trading data is reported by depository institutions, and collected and published by the Fed.

Ø  The FF target range is currently 1.25 – 1.50%, and the effective FF rate – with the exception of days which are on month-end – typically trades 8 bps below the upper end of the target. Right now that means the EFF rate is trading steadily at 1.42% with daily trading volume in the range of $80 to $100 billion. You can find complete details here.

Financial institutions borrowing funds from the Fed, secured by a wide range of collateral

Discount window lending rate – The rate the Fed charges eligible institutions to borrow money from the Fed on a secured basis, where a very wide range of collateral is accepted. Borrowing from the Fed at the so-called discount window for large institutions is generally seen, and meant to be, a measure of last resort. There are smaller banks and financial institutions which engage in typically seasonal borrowing from the discount window, which is not an indication of stress. The discount window rate is set at the upper bound of the target Fed funds rate + 50 basis points; currently 2.00%.

Technical note: The GSEs (Fannie Mae, Freddie Mac, the Federal Home Loan Banks, et al) are not eligible to earn IOR on their excess cash because these organizations are not depository institutions. Their participation in the Fed funds market is one-sided as they enter only as lenders of funds to depository institutions (banks), not as borrowers. Because the GSEs (a) cannot earn IOR from the Fed; and (b) do not owe depository institution insurance fees to the FDIC, they are willing to lend their excess funds at rates below IOR.