Some bank heads at the Fed are conflicted as to when to raise interest rates in response to expected strong economic conditions. Read more:

http://moneynews.com/Fin...es/2010/03/16/id/352925

Tyler Durden (my favourite anarchist) at zero hedge has an interesting article on the money multiplier (M3/Monetary Base) in the US in 2009. In the Kenyan context the money multiplier (money supply/reserves) has grown from 4.0 in December 2000 to 5.3 in December 2005 to 6.0 as at January 2010. Reserves are want commercial banks use to gauge their lending...leverage...the more reserves you have the more you can lend.

In 2008 it peaked at 6.1 in April 2008 during Safcom IPO, which is when the CBK used policy tools reverse repo and term auction facility to prop up the monetary base. In 2009 it peaked twice in April 2009 and October 2009. In response to the April 2009 peak the CBK began pumping reserves in May 2009 and began spending more money in November 2009 to counter the October peak.

The situation in the US is a little different considering the expansion of the monetary base in 2008 and the Fed paying interest on excess reserves. The money multiplier in the US is 0.95. The multiplier ended up this way because reserves injected in no longer stimulated credit expansion. Read more in the article below:

http://www.zerohedge.com...ults-only-79-cent-increa

Bob Prechter, Elliot Wave Theory president, questions that relationship between stocks and bonds...more specially the assumption that they compete with each other through some sort of inverse relationship. He tries to explain how this theory may not be realistic in the real world by charting graphs showing interest rates vs index movements during economic depressions. This is important to understand what happens to the market when interest rates are zero bound (going to 0%).

Read the article and see the graphs below:

http://www.elliottwave.c...-Is-Not-In-Control.aspx

Excerpt from the article

Bob shows this close-up of the history of the four biggest stock market declines of the past 100 years and continues:

"In ALL of these cases, interest rates fell and in two of those cases, they went all the way to zero! In those cases, investors should have traded ALL their bonds for stocks. But they didn't; instead, they sold stocks and bought bonds. To conclude, events and conditions do not make investors behave in any particular way that can be identified. Economists who assert a relationship (1) believe in their bedrock theory and (2) never check the data."

@guru267. Well that makes a lot of sense. They don't teach you that kind of stuff at uni though, huh. I'm also a fan of economic theory and desperately trying to link it to Kenya, so I can understand it from a local perspective.

Turns out not all the branches of the Federal Reserve Bank are in agreement that interest rates should kept low as it encourages risky behavior. These are the sentiments of Kansas City Federal Reserve Bank President Thomas Hoenig.

Hoenig is a voter on the Fed's policy setting panel this year and has dissented against the Federal Reserve Chairman Ben Bernanke and the U.S. central bank's promise to hold rates exceptionally low for an extended period, arguing it is no longer necessary for the Fed to tie its hands while the economy recovers.

He said on Wednesday the Fed could raise rates to around 1 percent, which would keep borrowing costs at historically low levels while sending a signal that easy money policies put in place during the crisis are steadily being pulled back.

"The time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy," Hoenig said.

Read more:

http://moneynews.com/Hea...LES/2010/04/07/id/355044

I think these rates are going to continue the nose dive...perhaps the low inflation expectations are contributing. 182 has fallen faster but also attracted more players, may be that explains the spread.

Interest rates at 4.9%. We are back to the Mwiraria days but at least this time the fall is gradual. It does not make sense for banks to put cash in T-bills when they can earn more on lending overdrafts. So more lending by banks more cash in the economy and We should expect a bull run on the equities.

Almost missed this. Analysts highlight the principals in monetizing budget deficit. CBK buys old bonds to enable banks to buy new bonds. CBK can't buy directly and public don't have enough savings to channel to Treasury coughers. The trick here is to add liquidity, when needed, to exploit the money multiplier.

What's interesting is what would be the floor for the T-bill? Looks like some experts speculate it'll be equivalent to interbank rate/reverse repo. But this only seems to work if the policy is expansionary, non? We covered this topic in posts 9-11, posts 14-17.

Excerpt from BD article:

The spread between reverse repo and the t-bill (difference between the rates of the two) is also going to be a major determinant of the depth to which t-bill levels will sink.

Analysts say that CBK could also decide to ignore inflation as the anchor or floor for the t-bill rate and go for the reverse repo – instrument which commercial banks acquire cash from the CBK to meet temporary liquidity needs – which is currently at about 2.6 per cent that is more or less close to the repo (at which CBK mops cash from the market) rate.

Read more:

http://www.businessdaily...1/-/d7oxf9z/-/index.html

@Kizee. You're right they could theoretically bring it back to 1% but at 2% they could not borrow on reverse repo to do it. They'll be taking incredible liquidity risk for little reward, non? (as we can see CBK cannot be trusted to spend into clearing accounts). You're saying there's no floor?

theres a floor..zero or 0.95 as per the past...im not of the view that we see further lowering...unless the cbk forces the rats lower...as ive said many times before..a repo shud never ever be a borrowing tool...a repo is an OMO tool...they cud actually tailor theyr cbr around repo rates( maybe a few basis points below) that way cbr wud have a stronger signallin effect...either way...cbk can do whatever...ive been in this mkt in 03 and 05 and saw rates crush to 0.95 and move from 2pct to 15pct in a week...cbk can do anytg they wont my frd

Is the era of zero interest rates over? Not quite yet? The Department of Housing and Urban Development in the US is going to dish out free money to unemployed homeowners. Would this be great in Kenya?

Read more:

http://www.zerohedge.com...ns-distressed-homeowners