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Mea Culpae/Culpas

Updated: Jun 27, 2022

In the interests of complete openness...

Chimp Investor is ranked #3 of 90 by Blog Overview and #10 of 100 by FeedSpot in their relevant categories. A review on WealthTender would be much appreciated.

The plural in Latin of culpa is culpae. However, some argue that when Latin nouns are used as phrases in a sentence in English, an 's' should be added. Thus 'culpas'. According to Wiktionary, both are correct. Phew, at least following this post I will not have to issue a mea culpa about having got the plural of mea culpa wrong.

But I digress...

Below are some clarifications in relation to recent blog posts.

Fed Funds Rate

In this recent post I wrote that since nobody lent or borrowed at the Fed Funds rate of interest as a result of banks' huge excess reserves, it was an ineffective policy tool, other than in communicating a message about the Fed's desired price of money.

This was and still is correct.

However, I perhaps should have mentioned the IORB (interest on reserve balances) rate, which is where there is a direct transmission mechanism. I certainly didn't want to suggest there wasn't a direct transmission mechanism at the Fed's disposal, which my piece might have done given that I didn't mention it.

Reserves held at the Fed are liabilities of financial institutions (banks) and banks pay the IORB rate on them to the Fed. If excess reserves are huge which they are currently as a result of QE, an increase in the IORB rate will cause banks' interest costs to rise, forcing them to increase lending rates. An increase in lending rates will tend to cool the economy and thus inflation, which is what the Fed desires currently. Direct transmission mechanism.

That being said, my main point was and still is that there is little public understanding about the Fed Funds Rate. I conducted a poll on LinkedIn, asking to whom banks pay the Fed Funds rate of interest. It received far too few votes to make the results statistically meaningful but it seems there could well be a widespread misunderstanding - only a minority got the question right.

I would urge anyone writing about the Fed Funds Rate to make it clear that it is currently an ineffective policy tool but that effective policy is conducted through the IORB rate.

Oh yes, one more thing: on the day last week that the Fed Funds rate was increased 75bp, the IORB rate was increased...75bp.

Microstrategy Inc.

In this piece about Microstrategy Inc. posted on Saturday I wrote,

However, MicroStrategy's share price has fallen only (sic) 66% - this was as of yesterday's close so unless the bitcoin price bounces back from its fall today it will be down more on Monday.

The US market was closed on Monday for a holiday. Rookie error. Embarrassed.

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

© Chimp Investor Ltd

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