Hello, I would like to discuss: The anomalous fed funds market

[Asher]

http://www.econbrowser.com/archives/2008/11/the_anomalous_f.html

[CrONoS]

Interesting article Asher

I'll bold the interesting part, in order to help others polytubbies.

we entered a brave new world on November 6 when the Fed began paying banks 1% interest on those deposits, the same rate as the target itself. This should have ensured that the effective fed funds rate never falls below the target. And yet the effective rate has never been above 35 basis points since the new policy of paying 100 basis points in interest on excess reserves was implemented.


There are two reasons why this tendency for the effective rate to come in well under the target rate is puzzling. The first is the obvious question: Why would anyone make a risky fed funds loan to another bank that only earns 0.35% when they could instead earn 1.0% at no risk by just doing nothing and letting the Fed pay them for holding excess reserves? I suggested the answer to this part of the puzzle when I first began discussing this issue:


[...]
If banks indeed are finding themselves hamstrung to the point that they are unwilling to pick up millions of dollars that are just lying around on the sidewalk, absolutely risk-free, then how can they possibly be expected to function in their traditional role of funneling capital to legitimate investments that all necessarily entail some risk? If this is indeed what is going on, we should be looking at the spread between the effective fed funds rate and the interest rate paid on excess reserves as another indicator of a profoundly sick financial system, indicative of even deeper problems than other widely watched numbers such as the TED spread.

[OneFootInTheGrave]

too complicated to understand the reasons for this "free money" being made available and subsequently not being picked up... there must be a catch somewhere along the line...

the end result seems to be this

the target itself has become largely irrelevant as an instrument of monetary policy, and discussions of "will the Fed cut further" and the "zero interest rate lower bound" are off the mark. There's surely no benefit whatever to trying to achieve an even lower value for the effective fed funds rate.

and that is ... perhaps US house of cards is less stable than it looks...

in short '09 could be really bad... US recession kicks in, deflation a real option, interest rate mechanism driven to the wall, even more rapidly expanding debt, falling taxes ... the potential of the second round of effects look well... scary, especially how the whole world relies on US and it's "bottomless" pockets. Let's hope that Obama hires Warren Buffet