The Daily Technical #20: What are the two main approaches to valuation?

Good morning. Welcome to the 20th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
If the Fed wants to lower rates, what can it do?

Start by grasping the key tools the Fed uses: open market operations and repurchase agreements.

Open Market Operations (OMOs): The Fed can purchase U.S. treasuries in the open market. This increases the money supply and lowers interest rates. As buyers store more cash, the supply rises, lowering T-bill yields. They’re pumping cash into the economy to encourage lending and spending.

Repurchase Agreements (RPs): The Fed engages in these agreements to supply more reserves to banks, which decreases the demand for reserves. Less demand equals lower Fed funds rate, allowing banks to offer cheaper loans.

Ensure your explanation logically connects each step to the next. Clearly show how these actions impact banks and, eventually, commercial borrowers and the broader economy.

Common Mistakes

1. Don’t skip critical steps, like explaining how open market operations lead to lower interest rates. Always clarify the connection between Fed actions and economic outcomes.

2. Mixing up OMOs and RPs can confuse your whole argument. Understand the distinct role each tool plays and explain them separately.

3. Avoid jargon without explanation. If you mention terms like "Fed funds rate," quickly define them so your reader isn’t left wondering if you’re full of shit.

Key Takeaways / TLDR

• The Fed lowers rates by buying treasuries (OMOs) or using repurchase agreements.

• Explain each mechanism clearly and connect actions to outcomes.

• Avoid jargon and ensure each step logically fits the narrative.

TODAY’S QUESTION
What are the two main approaches to valuation?

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