The Federal Reserve has been flooding the banking system with cash, so much so in the last week that it has pushed the effective overnight interest rate below the central bank's target 2%.
Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy.
Meanwhile, with the bailout assured, investors are expecting a bit of turbo power behind it with an interest-rate cut from the Federal Reserve, which currently is targeting a 2.0% annual interest rate on overnight money.
The most the ECB has done to try and encourage more lending is cut its overnight deposit rate, in other words paying less interest on money it borrows from banks overnight.
Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate.
The British Bankers' Association said the interbank cost of borrowing overnight had fallen - a day after interest rate cuts and governments provided additional liquidity.
Short-term interest rates such as the overnight bank borrowing rate and one-month and one- year Treasury bill rates are already close to zero.
By restricting its liquidity support, the ECB will be able to guide overnight interest rates towards 1% without having to alter its policy rate.
It is presumed that increases in the Fed's target rate for overnight loans are bad for stocks because high interest rates make the future earnings from corporations less valuable today.
The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.
The attendees, including European Central Bank head Jean Claude Trichet, are gathering just weeks after the Bernanke Fed halted a string of 17 straight interest rate increases over the last two years, holding its overnight rate to 5.25% after 17 straight increases over the last two years.
The three-month Libor is at 3.77%, according to UBS, and the difference between that and the overnight rate suggests "interbank lending is broken, " said William O'Donnell, the head of U.S. interest rate strategy at UBS. Rather than extend credit for longer than overnight, banks appear to be hoarding cash.
Yet now interest rates have gone even higher (this week the central bank raised the overnight rate from just under 30% to 32%), in order to stop the floating currency from sinking out of sight.
Even if the overnight rate is close to zero, the Committee should be able to influence longer-term interest rates by informing the public's expectations about the future course of monetary policy.
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