Rate hikes and import records | Freightonomics

Zach Strickland (0:15)

Welcome back to FreightWaves Today Now, Freightonomics version of FreightWaves Today. Zach Strickland here with DJ Donna Hugh, our head economist here at Sonar slash FreightWaves. And, you know, DJ, you're here for one person, and you're here for two people. And I'm gonna be talking to you about the FreightWaves and FreightWaves, and I'm gonna be talking to you about You know, DJ, you're here for one purpose today, and I know we're gonna talk about other things, but really the topic of discussion, the Fed rate increases. Julie and I were talking about it. She was like, you know what? She doesn't have time to sit there and parse through what a quarter percentage rate, like that sounds so trivial, so trifling, and I have to keep up with this with a lazy eye. I'm from finance, so I naturally kind of gravitate towards learning about this and figuring it out and what it means.

Some of your predecessors, of course, we've had a lot of debates about what the Fed's purpose and function is and how much they're understanding. We had Jerome Powell come under fire after the pandemic for being too slow and dismissing inflation, which infamously may get unfairly tagged to his legacy.

But again, in his defense, and I was one of his critics at the time, was we had never seen anything like that before. And it's very, very challenging to understand a thing and then also come up with the right thing to do about it. And that's a very quick thing. But the thing we're here to talk about today, if I can say thing one more time, is this one. And it seems so trivial, a quarter percentage point increase over something that none of us have anything to do with necessarily. And that's what I want to dive into today. So number one, let's set the table. What is the Fed funds rate? And what is its primary purpose?

DJ Donna Hugh (2:11)

Sure. So you mentioned being in this from a finance standpoint. As an economist, we take much more of a 30,000-foot view instead of looking at individual bonds or securities.

Zach Strickland (2:20)

We're not trying to get into the bond market.

DJ Donna Hugh (2:22)

Yeah, we're not trying to go there yet. But when we're talking about the federal funds rate, what we mean is this is the rate that banks use to loan their reserves to each other. So first off, the Fed is not a commercial bank. The Fed is the bank of banks, and not just banks, but other institutions, which we'll get into. But the 25 basic points of the quarter interest rate point that we talked about is a range. So originally, they were looking at, what was it, 325 to 350 Now, they moved up to 375 to 40

Excuse me, it was 350, 375 Now, 375, 40 There it is. Right. There's the math.

This is the target range for what they're going to do, is to try and get banks to loan money to each other. This is a very upstream process. It is not something that directly translates into consumer credit card rates or mortgages, although it does have all those impacts.

What we're trying to talk about here is, I don't want to get too deep in the weeds on this unless we have time for it, but there's two entities that the Fed worries about. You've got commercial banks and credit unions and then non-bank entities that do business with the Fed. These non-bank entities are like your money market funds, like BlackRock, Fidelity. You're talking about government-sponsored entities like Fannie Mae and Freddie Mac. They do business with the Fed. And then you've got what they call primary dealers. Primary dealers are a pre-established list of 24 entities like Goldman Sachs, JP Morgan. They are the ones who actually hold money with the Fed as well. But they're more like on the investment side as opposed to the commercial banking side. So with those two entities, you've got two different sets of rates. You've got a cap for each of them, which sits at 4.0% for each side. On the non-bank side, it's called the standing repo facility rate. On the commercial bank side, it's called the discount rate or the discount window rate. That's what they use for emergency liquidity. Like, oh, heck, we're running into an It's a Wonderful Life scenario. We don't want to have the run on the bank. If you've never seen It's a Wonderful Life, it has a great scene talking about runs on banks.

Zach Strickland (4:29)

But they were fresh off of one a few years prior, 15, 20 years prior. So in that era, the Depression era was what was caused by the runs on the banks in a simplistic sense.