After Fed watch TED

Federal Open Market Committee (FOMC) will announce monetary policy decisions today at 19:00 GMT at the end of its two-day monetary policy meeting. It is widely expected that the FOMC members would vote to hike rates by 25 basis points at today’s announcement.

We, at FxWirePro, would keep a close watch over the next few days on the TED spread along with some other instruments. TED spread is the difference between the yield on 3-month Treasury bill and rates on interbank loans, which is represented by London Interbank Offered Rate (LIBOR). LIBOR bottomed in 2014 around 0.22 percent and jumped sharply from 0.32 percent to 0.61 percent in late 2015. After consolidating through the early half of the year, 3-month USD LIBOR started rising from 0.62 percent in July to 0.96 percent as of now, which is the highest level since the 2008/09 crisis. Similar rise happened last year before the Fed hike of 25 basis points in December, if that is the case then there is little to worry other than the higher interest rates. But if LIBOR continues to rise along with the TED spread, which can be read as the market demanded risk premium for holding loans other than the secured treasuries, it could point to funding shortage in the market along with the rise in the risk perception.

We don’t suspect that being the case, especially since the TED spread after reaching 0.68 percent in September, the highest level since May 2009 has declined to 0.45 percent. We suspect that the treasuries have been late to react to the possibility of a hike. Nevertheless, the spread demands a close scrutiny after the Fed over next couple of weeks.