The Fed has only raised rates once (+0.25%) in this so-called tightening cycle but the short-term rate where the rubber meets the road, Libor, has tightened by nearly 1% (1yr Libor), and it has risen more than 30 basis points in the last 5 weeks! This has put 4 times the Fed’s tightening pressure on all types of US Dollar borrowers around the world; from adjustable mortgages to student loans to financing for ships. This should be a major concern for the Fed.
The reason that Libor has risen is partially from the Fed turning to a raising posture over the last 2 years and thereby the market expecting more raising in the future (about half of it), but more alarming, Libor’s credit spread component accounts for the other half of the rise and has all come this year. The widening of Libor’s credit spread is thought to be primarily due to upcoming money market fund reforms that require higher quality investments. A mass migration is afoot from short-term instruments with credit risk into ones without. This pressure won’t abate until October 14th when these reforms are enacted.
But regardless of the reason (and it may be more complicated than just money-market funds) the US consumer that is acknowledged to be the last string the expansionary economy hangs by, has been dealt a de facto 1% tightening.
[single left-click on the chart to enlarge it]