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Has the Fed Already Lowered Interest Rates?

Has the Fed Already Lowered Interest Rates?

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We note straws in the wind which indicate that the Fed may already have lowered interest rates. While there has been no official announcement, we note with keen interest that yesterday afternoon Fed funds traded at 4.62%, more than half a point BELOW the official funds target rate of 5.25% In addition, the yield on the 30 day T-bill is now trading more than 1 full point BELOW the official funds rate. The Fed has complete control over the overnight rate. In fact, Fed funds is the one rate it does absolutely control. Late last week, when banks panicked and drove the funds rate up to 6%, the Fed intervened IMMEDIATELY, driving it back down to the official 5.25% rate. If the funds rate does not return to 5.25% today, we will infer that the Fed HAS ACTUALLY CUT RATES, AND BY A SIGNIFICANT AMOUNT (quarter point moves are typical; half point moves are somewhat unusual, except in serious situations). It is also extremely difficult for the Fed to hold the Funds rate a full point above the 30-day rate. Nor is there any reason they should wish to do so, since the signal the bond market is giving is now UNMISTAKABLE to even the most wilfully OBTUSE AT THE FED. The bond market is ordering the FED to cut, cut, cut.

Reply to
money.sage.com
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Since 1994, the Federal Reserve has always announced changes in target Fed Funds, usually at scheduled meetings of the FOMC and in emergencies between meeting. I am sure that if the Fed were to change its operating procedure, it would say so. Ben Bernanke, the current Fed chief, has long advocated central bank transparency.

Reply to
Beliavsky

The loan market can trump the Fed by setting its own rates. Sadly the Fed is incrediably out of step with the market this month and causing tremendous financial damage.

Reply to
rick++

While Fed Funds and Bills are ratcheting lower, any short-term rates with a whiff of credit risk have skyrocketed (take a look at CP). For now, this is a technical move to keep things moving, but if the Fed wants to ease, they'll let you know. It may come to that. Wait and see what happens when a lot of these levered trades unwind, including the infamous Yen carry trade (take a look at the JPY over the past few days). As of this writing, the stock market hasn't even reached the official definition of a correction (we may get there today). Historically, this is the slowest time of the year. Most of the big market players are on vacation. It will get slower over the next two weeks. If the markets don't normalize (meaning imbalances smooth out, not lower volatility) you get an ease at the September meeting (probably 50bp)

Reply to
bondguy1824

I'd say the tremendous financial damange was caused by the financial instituations and the fed is telling them they have to take their medicine this time. Now it hurts that the innocent will be knocked down along with the guilty -- but I'd say the guilty needs to get hit badly in order to keep excesses like this from happening again soon. Otherwise, what's the moral of the story? Do anything you want to get ahead -- you'll get bailed out.

Reply to
wyu

You are all wet. The *discount rate* is the rate that the Fed controls absolutely. The fed funds rate is set by the market. The Fed can influence it by printing more money (or promising to), but it does not have fundamental control of it.

Xho

Reply to
xhoster

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