Fed Funds Begin Trade at 6%; Highest Open Since 2001 (Update1)
By Ye Xie
Aug. 10 (Bloomberg) -- Federal funds began trading at 6 percent, the highest opening rate since January 2001, as demand for cash increased amid concern that losses in U.S. subprime mortgage debt will trigger a global credit crunch.
Fed funds traded above the central bank's 5.25 percent target for a second straight day. The Fed's benchmark was 6 percent the last time fed funds opened at this level. Stocks dropped worldwide today on speculation the losses in mortgage investments will hurt economic growth and earnings.
``The fact that the fed fund rate opened at 6 percent is a signal that markets are very nervous,'' said Ken Kim, an economist at Stone & McCarthy Research Associates in Skillman, New Jersey. ``It means that the banks are asking for a premium for the excess funds they are willing to lend. The Fed will continue to pump in reserves to try and get the funds rate down.''
The European Central Bank today loaned 61.05 billion euros ($83.6 billion), pumping funds into the banking system for a second day. The ECB added an unprecedented 94.8 billion euros yesterday and the Fed injected $24 billion to its banking system, the most since April.
Overnight Rates
Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces ``unprecedented disruptions'' that may reduce profit, suggesting a credit crunch that started with the U.S. subprime market will spread.
Overnight euro rates again rose to as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.
Fed funds, the U.S. overnight interbank lending rate, closed at 4 15/16 percent yesterday, after trading between 4 3/4 percent and 5 3/4 percent, and averaging 5.38 percent, according to ICAP Plc, the world's largest inter-dealer broker.
The central bank will probably add $15 billion reserves to the banking system with weekend repurchase agreements, or repos, to keep the Fed funds rate close to its target, according to Wrightson, an ICAP research unit specializing in U.S. government finance. In a normal market condition, the Fed only needs to add $3 billion today, according to Wrightson.
In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.
Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target. They don't signal a policy shift.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net .
Last Updated: August 10, 2007 07:59 EDT |
