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The Rate Cut That Already Happened

The recent liquidity problems of financial institutions have had the usual suspects clamoring for the Fed to cut interest rates. And on Friday they did, cutting the discount rate by 0.5% (from 6.25% to 5.75%). This has only temporarily silenced the calls for rate cuts — what people really want is a cut in the fed funds rate (not the discount rate), currently at 5.25%.

Ah, but they've already done that. Not officially, mind you — the target remains at 5.25% — but actual lending over the past several days has been at interest rates below the target rate.

Go, look. Search 07/01/2007 to 08/19/2007. Notice the "daily effective rate" and "standard deviation" — up until Aug. 9th, the daily rate had been comfortably within a few basis points of the target rate, and the standard deviations not more than 0.17. Since that date the daily rates have been under 5%, and standard deviations much higher.

They've already cut the fed funds rate. They just didn't tell anybody about it.

I wonder how long they'll hold the fed runds rate lower than their official target rate? Or will this silent rate cut become official with a reduction in the target rate?


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