On Dec 18, 2007 1:09 AM, Scott Fullwiler wrote:
> Hi Warren
> A few questions on your take on fed funds market data–
> Std dev of fed funds rate is way up since summer compared to normal, but
> looking at the high-low numbers, the deviation (at least max deviation) is
> most significant on the low end (since August 15, it’s been more than 0.5
> below the target rate 54 times and more than 1% below 37 times) . Ãƒâ€šÃ‚Â The high
> has only been more than 1% above the target a few times (7), though it’s
> been above 0.5% more than the target 26 times since mid-August (so much for
> doing away with frown costs).
> Anyway . . . what are your thoughts regarding how this persistent, sizable
> deviation on the low end is consistent with the story you’re generally
> telling? (i.e., Fed needs to lower discount rate to target and eliminate
My best guess is with the discount rate above the funds rate the NY Fed can’t keep the banks in a ‘net borrowed’ position or the bid for funds gaps up to something over the discount rate. Ãƒâ€šÃ‚Â So instead, they are trying to target ‘flat’ and err on the side of letting banks be a bit long as evidenced by funds dipping below the target, and then acting to offset that move.
Also, the NY Fed sets a ‘stop’ on the repo rate when it intervenes, and with the spread between ff and repo fluctuating more than before ‘the crisis’ it may be more difficult for the NY desk to pick the right repo rate to correspond with their interest rate target.
When the discount rate was below the ff rate it was a lot easier – they just kept banks net borrowed which caused them bid funds up above the discount rate and the Fed allowed them to continue higher until the got about 1/8% above the ff target and then intervene to make reserves available via open market operations at the equiv. repo rate.
The NY Fed isn’t saying anything about what they see happening, and why there is so much variation, which doesn’t help either. Ãƒâ€šÃ‚Â Here’s a spot where a little transparency and guidance can go a long way.
Is it as simple as saying there’s a lot more uncertainty in money
> markets and regarding the Fed’s reactions to the uncertainty? Ãƒâ€šÃ‚Â Perhaps,
> since the effective rate has been above the target (37 times) almost as much
> as below (45 times).
> Scott T. Fullwiler, Ph.D.
> Associate Professor of Economics
> James A. Leach Chair in Banking and Monetary Economics
> Department of Business Administration and Economics
> Wartburg College
> 100 Wartburg Blvd
> Waverly, IA Ãƒâ€šÃ‚Â 50677
Not to mention the NY Fed could always intervene ‘continuously’ with a bid and an offer, rather than once or twice a day.