Thursday, August 16, 2007

The Fed Funds Rate and the Request for the Fed to Cut Rates

It appears that the Fed has already cut the Fed Funds rate effective last Friday. One of the tools at the disposal of the Fed is the FOMC. With the large injections of cash starting last Thursday the Fed has already effectively cut the Fed Funds rate from an average of 5.28% the last half of July (3 bps over its target rate of 5.25%) to 5.13% the first half of August. Since Monday the average Fed Funds rate is 4.76% (admittedly only 3 data points).

The constant requests by various individuals in the investment community to lower the target rate by 0.25% is a waste of time and bad policy. The Fed has tools at its disposal to move the markets on a temporary basis without making the “large” move of dropping the target rate. It is better to attempt to move the markets with a surgical strategy then to make the “large” move and drop the target rate. After all, what is Plan B if the Fed drops the target rate and the markets do not improve. (double click on image to enlarge)

Personally, the Fed gets an “A” for last week’s cash injections

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