The Daily Dish - February 19, 2010

Well, it was fun while it lasted. The stay on Cloud Nine, the state of blissful happiness that I and many others found ourselves in after the Antawn Jamison trade came to a crashing halt last night as Carmelo Anthony buried a jumper in LeBron James’ face with 1.9 seconds left in overtime to lead the Nuggets to a win over the Cavs despite 43, 15, and 13 from King James. And Swerb heartthrob Lindsey Vonn crashed in the super-combined. Not a good night of television viewing.

The things kids say. My four year old son, long potty trained now, had a little accident the other day. But not according to him. When asked what happened, he insisted that he had not had an accident, and “was just sweating down there”. I couldn’t even be mad … that’s incredible creativity. Future CEO material there. My wife wanted to punish him. I wanted to see if I could get him started early at the Carnegie School of Business.

Ever have this happen to you? I’m walking across the street yesterday to get a bowl of soup and a salad at the fantastic “Soupermarket” here in Lakewood, and I hear “Hey! How’s it going?” No idea who the guy is. Guy starts chatting me up about how it’s been forever, asks how I’m doing, asking what I’ve been up to. I can’t place the guy. Who is this? I’m racking my memory … to no avail. About five minutes into the fifteen minute conversation, it becomes apparent: this guy thinks I am someone else, and I really don’t know him. Turns out this guy is a basketball coach at one of the area high schools, and he thinks I am one of his former players.

At this point, I have two choices. Tell him he’s mistaken, which ends things, albeit uncomfortably, and I’ve got a Market Greens salad with extra kalamata olives and a bowl of Mexican meatball soup within minutes. This is what most people would do. For some disturbed reason, I decide to go with it, and live this alternate identity for about ten more minutes. I’ve got to be careful not to expose myself, but I’m taking his leading statements and comments, and just going with ‘em. We’re hamming it up like old pals, cajoling about old teammates and good times in post-season tournaments, updating each other on our families.

It wasn’t until I got back to my office with my food until it hit me just how strange the whole situation was, especially my decision to role play the thing out. I’m telling you it’s this Keurig one-cup coffeemaker. After 5-6 cups of the Timothy’s Nicaraguan Blend, I’m ready to engage in a 15 minute conversation with a telephone pole.

Quote of the day …

”I’ve never won a championship, whether it was college, high school. I’ve been to All-Star games; I’ve experienced a lot of things. There’s only one thing left for me to achieve. It’s the one thing that keeps me going; it’s the one thing that drives me night in and night out. I said to myself, ‘It’s going to happen before I retire.’ I don’t have another five to 10 years left in this body. I’m just blessed to be put in this situation. ‘People always say, ‘Good things happen to good people,’ and that’s definitely a fact right now. I felt I’ve done things the right way and this is a great situation for me. I love what I do. I want to be the best. I want to hold that trophy up and be a part of something very special.” ~ New Cavalier Antawn Jamison

Market …

The financial markets got thrown for a little loop yesterday afternoon as the Federal Reserve surprised investors by raising their “overnight rate”, or “discount rate”, from 0.50% to 0.75%.

Before we get into why they did this and what the impact was and may be, let’s clarify the difference between the aforementioned “discount rate” and the “Fed funds rate”, because it is confusing. We hear news snippets all the time about the Fed raising and lowering rates. But there’s actually two different lending rates that the Fed puppeteers.

The Fed Funds rate is the rate you hear people talking about all the time. It is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. In layman’s terms, it is the interest rate banks charge each other for loans. The Federal Open Market Committee (FOMC) cannot specifically set that rate, which seems confusing, because it is. They set a target. The target is currently “between 0.00% and 0.25%”. The actual federal funds rate is the weighted average of interest rates that banks charge each other. It’s set by open market competition but comes remarkably close to the target set by the Fed.

By law, banks need to keep a percentage of funds in reserve. If they don’t have enough funds, they borrow from other banks with excesses to meet this overnight requirement at a certain interest rate. This is the federal funds rate.

Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window at the “discount rate”, which was what was raised yesterday from 0.50% to 0.75%. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate, which they did yesterday. Make sense now?

So what does it mean? How will it impact the markets?

Primarily, what it signals is the beginning of the withdrawal of all the emergency measures we saw when the economy started to spiral into an abyss a couple years back and we saw all of this federal intervention into the markets. The Fed was sure to make clear yesterday that this move was a “normalization” of lending that wouldn’t affect monetary policy, and the main federal funds rate would remain low for an “extended period.” So while the headlines are filled today with scary talk about the “Fed raising rates”, which will likely prompt all kinds of questions from clients, really, it means little, and it’s effect on mortgage rates and the other financial markets will be minimal. In reality, “discount window” borrowing from the Fed is fairly limited. Institutions will often seek other means of meeting short-term liquidity needs.

In other market news this morning, the Labor Department reported that consumer prices (CPI) rose less than expected in January while prices excluding food and energy actually fell, something that hasn’t happened in more than a quarter-century. Consumer prices edged up 0.2% in January while prices excluding food and energy slipped 0.1%. That was the first monthly decline since December 1982.

The benign inflation news gives the Fed more time to keep interest rates at record-low levels to shore up the economy and should ease worries in financial markets that a Fed rate hike is more imminent. The news on consumer prices was better than expected, especially after a government report Thursday showed that wholesale prices shot up 1.4% in January.

News …

~ Fed Raises Discount Rate From 0.50% to 0.75%

http://www.cnbc.com/id/35465481

~ Fed Seeks to Calm Markets After Discount Rate Rise

http://www.cnbc.com/id/35473663

~ Fed Discount Rate Hike Signals End to Emergency Measures

http://www.bloomberg.com/apps/news?pid=20601087&sid=amj4X4IWKCys

~ Who’s Afraid of the Fed? Market Wants Rate Hikes …

http://www.cnbc.com/id/35462014

~ Obama Pushes For More US Housing Help

http://www.cnbc.com/id/35475552

~ Core Consumer Prices Fall in January