Getting back to normal in the Fed funds market?

Watching the Fed funds rate during this credit crisis is a good way of determining whether the banking system is getting back to normal. It also provides good information on what the Fed is actually doing not just what they say they are doing. Actions speak loader than words.

During most of the credit crunch crisis in August, the Fed fund actually trade below its target. The graph shows the high, low and close of the Fed funds rate since the beginning of the year. The range stays very close to the target during normal times. We can call the behavior of the Fed funds relative to the target, a shadow or stealth cut in interest rates. There was no announcement but the Fed was willing to supply credit to the banking system which drove down rates. They were a significant supplier of liquidity separate from the discount rate action.

The system seems to be moving back to normal with the range of the fed funds closer to the target, but the question is whether the stealth cut will be made more explicit through an announced change in the target rate. With the stock market up and the economy seeming to be moving along nicely, there is less reason to make a target rate change permanent. The stealth cut worked and still leaves the fed with alternatives.