Fed target rate is now effectively 0.25%

Although the Federal Reserve FOMC surprised everyone by cutting their federal funds target rate not just by three-quarters of a point to 0.25% but to a "target range" of 0.00% to 0.25%. But, all the banks cut their prime rate by three-quarters of a point from 4.00% to 3.25%. So, the fed target rate is effectively 0.25%, but the Fed has the flexibility to treat the rate as 0.00% or anything in between as conditions warrant.

Note that federal funds trade in a range anyway. Recently, the range had been between 0.01% and 1.00% and averaged below 0.25%, so there had been an implicit deline in demand in the market of more than three-quarters of a point even without FOMC "action."

It is not clear which rate is more significant to the economy, the prime rate or the inter-bank overnight lending rate. On the other hand, the difference (less than a quarter point) may not be significant enough to detect at a macro level.

The real bottom line here is that the Federal Reserve is assuring that the major banks will have all the money that they might need. That does not mean that banks will lend to any but the most creditworthy borrowers, but that is a factor that the Federal Reserve cannot control with the federal funds rate.

-- Jack Krupansky