Powell at Congress Today

SOFR taking over

Jerome Powell is on tap today at 10am EST on Capitol Hill as part of his two day session. We hope that our congressional leaders will have some challenging questions for Mr. Powell so we can gain some insight as to their real expectations for rates, inflation etc. We know that this rate hike cycle has seen the steepest trajectory in rate hikes ever and that there are growing concerns about the possibility of a recession later this year. With all this mind, we wanted to share one of the best insights that we have read in some time as to the true reality of our current monetary state of affairs and insight as to one of the main reasons why the Federal Reserve has raised rates so dramatically.

The name of the author is Tom Luongo and he authored the piece entitled, “The War for the Dollar is Already Over Part I.” He posted it to his blog “ Gold, Goats N’ Guns”

This is by far one of the most important pieces we have read this year and offers some excellent insight as for the real reason the rate hikes have been so dramatic. Magnelibra has talked for quite some time that it is the offshore dollar/credit creation mechanism and market that is the real power behind the US Dollars power. With so many dollars offshore and with virtually a significant more of an influence on global funding needs than domestic US Dollars there is a global shift underway as to how spread product related to these dollars are actually benchmarked.

The old LIBOR system is being replaced with a new collateralized benchmark known as SOFR or the Secured Overnight Funding Rate. This has some major implications. The largest implication is one by which the US Treasury and the Federal Reserve, return the pricing of this rate back to a domestic United States operation via the establishment of ARRC or “The Alternative Reference Rates Committee.” This is a very big deal!