Lots More with Joe Abate on the Fed's New Target and the Rising Price of Money

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Joe Weisenthal (0:07)

Joe one and Joe two, I always have to-

Tracy Alloway (0:09)

Which one is which?

Joe Weisenthal (0:10)

Yeah, I have to remember that. Well, you can answer whenever you want.

Tracy Alloway (0:13)

Okay, that sounds good.

Joe Weisenthal (0:14)

All right.

Tracy Alloway (0:15)

I might just sit back with this one. I might just listen to Joe's answers, and then listen to your questions, which would be better than mine.

I did a dead list.

Joe Weisenthal (0:25)

I am both the most popular trader and most successful trader at Citadel.

Tracy Alloway (0:30)

Fed is going viral.

Joe Weisenthal (0:31)

Barges.

Tracy Alloway (0:32)

This is an after school special, except...

Joe Weisenthal (0:34)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Tracy Alloway (0:40)

Black gold.

Joe Weisenthal (0:41)

These are the important questions. Is it robots taking over the world?

Tracy Alloway (0:44)

No, I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day, that person will have the mandate of heaven.

Joe Weisenthal (0:53)

How do I get more popular and successful?

Tracy Alloway (0:56)

We do have the perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:03)

Because even when Odd Lots is over, there's always lots more.

Tracy Alloway (1:08)

We really do have the perfect guest.

Joe Weisenthal (1:13)

I think we've been lying to our listeners and our viewers.

Tracy Alloway (1:16)

Go on. This is intriguing.

Joe Weisenthal (1:18)

We keep saying the Fed is raising or lowering interest rates.

Tracy Alloway (1:21)

Yeah. I like this. I already see where we're going with this.

Joe Weisenthal (1:24)

But actually, there's this whole constellation of rates, and we never really specify which one.

Tracy Alloway (1:31)

It's a list of a lie, more of an omission, etc. It is true, especially at the short-term level, that there are all these different rates, and they get abstracted away because I guess they can be arbed one way between the two if they ever deviate. So the Fed can influence these other rates, and obviously generally strongly does, but there's no guarantee that all these short-term rates always converge identically.

Joe Weisenthal (1:55)

No, and we have seen, for instance, instances where the market rates have gone far, far outside what the Fed is actually targeting. So I should just say, when the Fed raises or lowers interest rates, it does it through, well, it targets the Fed funds rate.

Tracy Alloway (2:10)

Yeah.

Joe Weisenthal (2:10)

Okay, and I think everyone has heard of that, but the way it mechanically does it has changed over time. In fact, it changed in a pretty big way early on in our financial journalistic careers. So we should definitely talk about it. Who's the guy that we call when we want to talk money markets and mechanics of interest rates?

Tracy Alloway (2:29)

Go on.

Joe Weisenthal (2:30)

It's Joe Abate.

Tracy Alloway (2:31)

I'm really excited.

Joe Weisenthal (2:32)

So Joe has actually left Barclays after more than 28 years, and he's now at SMBC Nikko. He's head of macro strategy. So we're looking forward to hearing even more from him. Joe, talk to us about how the actual mechanics of raising and changing rates has changed over time.

Joe Abate (2:51)

So originally the Fed started with a scarce reserve regime. And the idea was that the level of liquidity in the system was always kept a little bit short of what banks really wanted to hold. And that created a little bit of torque in this interbank market, the Fed funds market. And that allowed the Fed to move the Fed funds rate to exactly where it wanted to set the target. And the target was set at a pinpoint level of interest rates. Over time, and certainly beginning in about 2008, the Fed shifted to a different format. And in that format, the Fed would supply an ample or abundant level of reserves and let the Fed funds rate trade, or at least in this case, not trade at some spread or band between an upper and lower band where it set the target. And originally, it set the target range band because it wasn't confident that this new structure would keep the Fed funds rate close to a pinpoint level. But if you supply an abundant level of reserves into the system, what happens is the Fed funds market changes fundamentally.

Joe Weisenthal (4:06)

It adapts.