Well, now I have to amend the graph that I taught to my students YESTERDAY!!!  - Laughing!

Reproduced here from the NY Fed's website on Federal Funds Rates:

 
The dark line shows the "target" rate and the pink line the "daily" federal funds rate.  Now the target is 0.25% to 0%!!  HOWEVER, Notice that the daily rate ALREADY trades there!!  Laughing - the market was already there and leading the Fed (which usually happens with Treasury Bills - I have yet to produce that graph but will for class).

Notice how right around Lehman Bros bankruptcy, the daily rate began a huge fluctuation?!!?  So the question has been (amongst those in the wonkish Economics circles), has the Fed lost control of the FF rate?!!?  Well, now they seem to be back in control, or at least recognizing the reality!

What are they going to do now?!?

First let's show the past 8 years, from the New York Times:

                               Here you can see the recession when George Bush came into office (the recession really started under Bill Clinton) and the one we are in currently.  What happens to interest rates in recessions?  They fall, eh?  Seems obvious from here to me too.  So that's what we teach.

Here is how the New York Times article (linked above) stated the volatility I graphed above (and " What the Fed is going to do now"):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The move to a zero rate, which affects how much banks charge when they lend their reserves to each other, is to some degree symbolic. Though the Fed’s target had had previously been 1 percent, demand for interbank lending has been so low that the actual Fed funds rate has hovering just above zero for the past month.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Far more important than the rate itself, the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.

In essence, the Fed is embarking on a radically different route to stimulate the faltering economy, and it puts the Fed chairman, Ben S. Bernanke, in partnership with the incoming Obama administration as it moves on a parallel track.

On Tuesday, President-elect Barack Obama called his economic team to Chicago for a four-hour meeting, their longest to date, to make decisions about the particulars of his two-year economic recovery plan that is likely to exceed $600 billion in tax cuts and spending stimulus.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

From Bloomberg.com:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks soared, while Treasury notes rallied in anticipation the Fed will buy the securities to reduce borrowing costs for consumers and companies. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending had failed to reverse the economic downturn. The Fed said today it will target a federal funds rate of between zero and 0.25 percent, a reduction from the 1 percent level that the Fed failed to hit.

and then later the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

So it is a BRAVE NEW WORLD OUT THERE!!!  More on DEFLATION in the NEXT POST - CPI Falls by a Record Amount!!