A Stealth Fed Rate Cut?

by: Barry Ritholtz

Thursday's absurdity was this rumor circulating that the Fed was arranging a secret meeting. Then the rumor came that it was going to cut next week.

But my favorite rumor du jour was passed along by the WSJ: You see, according to some of the more clever Horse Central Bank Whisperers out there, the FED HAS ALREADY CUT RATES.

The Fed's primary weapon is its influence over the federal-funds interest rate, at which banks with excess reserves lend to banks that are short reserves. When demand soared last week and the market interest rate rose above the target, the Fed pumped in extra cash. But in times of turmoil, it can be difficult for the Federal Reserve Bank of New York to fine-tune its interventions. In recent days, the rate has traded well below the Fed's target at some points of the day -- even coming close to zero at times. That has prompted some in the markets to deem this "a stealth Fed easing."

That was the reason given for the comeback Thursday. Not that we had sold down 1,500 Dow points in less than a month, but (shhhhh!) whisper after me: "Fed cut."

Stealth cut, or absurd rumor?


Has the Fed Secretly Cut U.S. Interest Rates?
Markets Wonder As Federal-Funds Rate Lingers Below Target
DAVID WESSEL in Washington, LAURENCE NORMAN in New York, ENDA CURRAN in Sydney and MICHAEL S. ARNOLD in Tokyo
WSJ, August 16, 2007 2:25 p.m.