The Carpet Crawlers

The crawlers cover the floor in the red ochre corridor.
For my second sight of people, they've more lifeblood than before.
They're moving. They're moving in time to a heavy wooden door,
Where the needle's eye is winking, closing in on the poor.
The carpet crawlers heed their callers:
"We've got to get in to get out
We've got to get in to get out."

There's only one direction in the faces that I see;
It's upward to the ceiling, where the chambers said to be.
Like the forest fight for sunlight, that takes root in every tree.
They are pulled up by the magnet, believing that they're free.
The carpet crawlers heed their callers:
"We've got to get in to get out
We've got to get in to get out."   -P Gabriel et al.

Something is going on down around the floor. If we are correct, the Yellen Fed will verify the "carpet crawl" back to a Rates Regime has officially begun. This should bring into focus the gaps in the "floor" that are presently taken for granted. When ZIRP became a thang, market participants were content to gel the rate around the middle of the 0 to 25 band. As liquidity grew, rates between 12 and 08 became common. Dysfunction in GC rates was persistent and accepted. IMM day yesterday saw another Eurodollar contract expire at 23+.

What is the "floor" ? More importantly, with the track record of pegging a target rate so poor, why should we believe the Fed will get this attempt right? One thing we know for sure, that rate is not the 5bp currently radiating out of the Death Star. If the slippage below 12 is attributable to the GSEs, then we would move the DStar rate to 8 or even 10 at the meeting. This would at least fill a harmless gap and open the door to looking at the difference between there and the top of the ZIRP band - also known as IOER.

Returning to a Rates Regime also shows that the DStar rate will be the important SET rate where Fed Funds used to rule. As any money market player worth his weight knows, a monopolist can set quantity or price but not both. Why the Fed again feels confident they "know" what price is right is beyond me. The FOMC will have to bring these proxies together, however. As Matt Boesler at Business Insider has been watching, a record short base has grown into the Eurodollar complex since open interest shifted out the term structure. If the floor is lower, or softer, than anticipated a significant squeeze could occur. Such a movement would also come at the disgrace of the other Fed policy tool of Forward Guidance. If FG works, then players should not be caught wrong footed.

Just like the Carpet Crawlers...You've gotta get in to get out.

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