Professor Mark J. Perry's Blog for Economics and Finance
Fed Statement on Interest Rates: The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1%.
MP: The Fed cut the federal funds rate to below 1% more than two weeks ago, see chart above of the actual, effective fed funds rate since October 10 (data here), averaging 0.83% from October 10 to October 27.
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
9 Comments:
As I said before, we're suffering chronic deflation. Expect the target fed funds rate to go lower, probably zero by the end of '09.
And they're not even targeting it anyway, so why does anyone even care?
btw, Even Roubini (the man who has called this perfectly since 2006), is saying that in 2009 we'll face global deflation
Mark,
Thanks for posting the chart. Thought the announcement by the Fed today was much ado about nothing.
Have shared a link to this post on Twitter. Hope you get some traffic from http://is.gd/5bB5.
ATB,
David
Can anybody explain to me what is the difference between the effective Fed rate and the nominal Fed rate?
Thanks
mm
Federal Funds Rate - wikipedia
The Fed sets a target rate but must then defend it through open market operations. Depending on whether they are setting the nominal rate higher or lower they must either issue loans or buy out loans to bring the intra-bank lending market rates to the target.
My interpretation of what why the Fed has been issuing below nominal loans is a combination of a) the banks simply can't pay the interest back and b) they are trying to fight the intuitive market reaction that increased risk means increase risk premiums (higher interest rates) - and that higher rates choke off lending even more.
Matt,
Slight change
"Depending on whether they are setting the nominal rate higher or lower they must either issue loans or buy out loans to bring ..."
the Fed is buying and selling government securities through its open market operations. They are either increasing or decreasing the supply of money into the bank thus increasing or decreasing their reserve which ultimately allows the bank to loan more or less money.
Lost decade, ZIRP coming at you live. It's gonna suck when the US defaults on the debt but that is the way the cookie crumbles.
The Fed declares overnight rates, which is basically a floor for interbank accounts. THEN government securities are auctioned to banks at the lowest interest that the local banks will accept. Money is the credit of the local bank, which is why local banks can buy govern ment securities for lower interest than the lowest interest that they are paying for cash accounts.
The Fed just lowered overnight rates again, to one percent, which again makes lenders less willing to lend, and so shrinks the money supply again. The major crap will probably be manifest in about 8 days. Watch for about 30% of Dow Jones to evaporate.
> The Fed just lowered overnight rates again, to one percent, which again makes lenders less willing to lend, and so shrinks the money supply again.
That makes no sense. All they do is adjust their rates to match, so they make the exact same amount of profit off of money lent. There's no reason whatsoever why they would be "less" willing to lend. And the lower rate DOES make others more willing to BORROW, which means that more will be lent, and the money supply expanded.
As far as whether or not this expansion of the money supply is a good or bad thing, that can be debated -- but, since it's generally agreed that it was the Fed's contraction of the money supply which caused the Great Depression to be so deep and so long, it's hardly likely that the resulting expansion is going to hurt as bad as a contraction would.
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