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Big Banks Want Rates To Go Up, Or Go Down, Or What The Hell Maybe Stay The Same

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Got that?

1. Brian Moynihan told Bruce Berkowitz this afternoon, "I'm comfortable we can get to 1% return on assets based on a 1.25%-1.5% Fed funds rate and a normal business cycle." Moving to 1.5%-area short term rates would apparently add about $3 billion to BofA's net revenue.

2. Jamie Dimon chatted with Melissa Francis this morning and told her:

Francis: Let's talk about making money in your business. The Federal Reserve came out and said they will keep rates low for the next two years. You recently said you need interest rates to go up in order to improve your net interest margins. Does it cripple your business? Does it make it hard for you?

Dimon: I didn't say that. And I constantly read people saying that we make money - the Fed is supporting banks, which I think is completely untrue.

Francis: Isn't it the opposite?

Dimon: We are essentially match-funded. Rates affect our business. If short rates go up we can probably make more money. Not less money. If long rates go up we will probably make slightly more money, not less money. We try to match those funds. ... I think the world of Ben Bernanke and I am going to leave monetary policy to them.

3. Meanwhile those suspicious of the banks think that low rates are a gift to banks. A sample:

[Yesterday] the Fed simply gave the banks the go-ahead to go out the yield curve in massive amounts. That’s all it was. Banks can’t make money on deposits, as the Bank of New York negative interest rate alerted the market, unless they go way out the curve. Running a high-duration book with short-term funding can be a death trap, and banks were reluctant to do so, believing, as most of the world did, that rates would rise and long-term bonds would lose value.

Once the Fed said the magic words, the banks piled in with everything they had. Blink, and the trade was over. That adds directly to the banks’ bottom line.

Or, if you think Jan Hatzius controls the Fed, Goldman's pre-Fed note yesterday suggested a negative (1.7%) Fed Funds would be more like it:

Under our new forecasts our QE-adjusted Taylor rule implies that the “warranted” funds rate is currently -1.7%. (This figure is obtained by adjusting the funds rate implied by our baseline Taylor rule, -3.7%, with our estimate of the effectiveness of the Fed's unconventional policies, equal to 2%. For details, see US Economics Analyst, October 22, 2010.)

What do you think? Is Moynihan really pining for 1.5% Fed Funds / planning to start charging fees on deposits? Is Goldman secretly whispering in Ben Bernanke's ear so it can safely back up the truck on a UST carry trade? Does Jamie Dimon not care and just want to enjoy some quality time with bank tellers?

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