Pushing on a string

29 November 2007 By Martin Hutchinson

The Dow rose 331 points on expectations of another quarterpoint Fed rate cut on December 11. But conditions in the interbank market suggest the Federal Funds rate has become irrelevant to the financial market crisis. Liquidity and credit risk are what matter now.

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Donald L. Kohn, Vice Chairman of the Federal Reserve, said on November 28 that the Fed would be nimble in its response to financial market difficulties. The stock market took this as a symbol that the Fed would cut rates again when it meets on December 11, and the Dow Jones index rose 331 points.

Threemonth LIBOR traded at 62 basis points above the Federal Funds rate and 217 basis points above the 3month Treasury bill rate on Nov 29, close to August/September highs. The 3 month Treasury bill rate was trading at 2.96% on November 29, 154 basis points below the Fed's target Federal Funds rate of 4.50.

Countrywide Financial, the leading home lending bank, has borrowed $51.4bn from the Federal Home Loan Bank of Atlanta, pledging mortgages as collateral.

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