I mentioned in my last blog that there was a chance that the fed funds rate
might drop in the afternoon, reflecting the possibility that banks with
excess funds (typically smaller banks) would have difficulty unloading their
excess funds onto institutions typically in need of funds (larger banks) and
hence would offer their monies at lower rates, driving the funds rate lower.
Larger banks probably are sated with excess funds, thanks to the Fed's $38
billion in liquidity injections today, and hence have no need to buy the
excess funds offered by smaller banks. This is driving the funds rate
lower. The funds rate is currently trading at 5%, a sudden drop from the
5.25% rate that prevailed since about 11 a.m. ET.
The bid/offer is 4.75/5.00%. There will be a small minority that believes the Federal Reserve cut its target interest rate to 5% today and will validate the
cut through a statement next week, especially if large amounts of liquidity
are needed on a daily basis.
Again, the main takeaway from the falling funds rate is that it makes the
Fed's actions seem more out of an abundance of caution than an action meant
to address problems not yet at the surface. Moreover, and probably most
important, the falling funds rate indicates that the Fed decided today to be
pre-emptive rather than let problems boil.
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Tony Crescenzi Blog Looks Like Fed Seeks Surfeit of Liquidity 8/10/2007 2:44 PM EDT The Fed makes its third liquidity injection with fed funds trading at the target rate of 5.25%.
Tony Crescenzi Blog Analyzing the Fed's Second Operation 8/10/2007 12:06 PM EDT This action was meant to provide a surfeit of liquidity and was not a response to hidden problems.
Tony Crescenzi Blog Market Sees September Cut 8/10/2007 10:26 AM EDT The odds go up again for a sooner-rather-than-later rate cut.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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