20 August 2007

Something funny in the Fed rate

Although the US Federal Reserve lowered the discount rate on Friday in response to current market conditions, from 6.25% to 5.75%, it has so far left the Fed Funds target rate unchanged at 5.25%. (For an explanation of the relationship between the two rates, see Wikipedia.)

However, via Brad DeLong, Felix Salmon and William Polley, I come across this interesting chart showing the daily high, low and average of the actual Fed Funds rate (i.e. the rate at which banks lend their reserves with the Fed to each other). I'm not sure how to interpret it, but it certainly looks odd. William Polley's explanation is worth reading. Although the chart only goes as far as last Tuesday, the situation has not changed much since.

At first sight, it looks as if monetary conditions are a lot looser right now than they seem.