Tuesday, September 16, 2008

Fed funds freeze a problem

The overnight Fed funds rate rose to 3.75% as banks were unwilling to lend to each other. The lack of movement in the Fed funds market is the sort of gridlock which only happens in a true period of credit uncertainty. This is also the time when the Fed has to behave as the lender of last resort. This is not an issue of what is the price for funds but the basic need for funds. We have talked before about how the quantity side of credit can be the most disruptive. This doe not require the Fed to lower rates but just keep them at the target by supplying funds. I clear signal of being willing to provide funds will stabilize the markets.

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