How do we get from the  “New Normal” to “Normalization”? 

Last week’s Fed minutes indicated that the tapering process is set with all bond buying to end this fall.  The new buzzword from the minutes and some recent Fed Governors’ remarks is “normalization”.  Investor speculation is now focused on the raising of the short term rates which affects LIBOR and Prime lending indices.  However, the Fed may experiment with other tools such as Reverse Repurchase Agreements (RRPs) which drains liquidity from the system as the Fed sells assets with an agreement to buy it back the next day or so.  This results in an “implied short term rate” based on the length of time, and the difference between the sale price and the repurchase price.  This may be a more effective and “gentle” tool rather than the traditional rise in the Fed Funds and Discount Rates.  It will be very interesting to see how LIBOR indices react to this as they usually would move simultaneously with the traditional methods. ….stay tuned…. David R. Pascale, Jr.