Fed giving it away

How else do you describe the Federal Reserve setting its target for the overnight federal funds rate to a range of 0 to 0.25 percent? The rate has never been this low. But what exactly will it mean? The Fed has been continually making it cheaper for banks to lend money, and banks have steadfastly refused. (Actually, demand for interbank loans has been so low that the actual Fed funds rate hovers around 0.1 percent.) Lenders base the interest they charge borrowers on two things: a risk-free rate - typically the yield on government securities - and various risk premiums (this is the reward for taking a chance on loans that are not sure things). The lower the Fed pushes down those risk-free rates - now basically at zero- the less onerous those risk premiums will be. At least that's the idea. From the FT:

The Fed will continue to seek out ways to hammer down risk spreads. These involve liquidity operations that have morphed into outright credit operations: lending to banks and companies directly via the commercial paper market and purchasing securities issued by Fannie Mae and Freddie Mac. The US central bank is now backstopping markets – the asset-backed securities market, the commercial paper market – as well as financial institutions. There are some signs that its efforts, and the Treasury drive to recapitalise the banking system, are beginning to bear fruit. The problem is that as the Fed pushes ever deeper into financing, it is to some extent displacing the private markets...



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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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