After a rather wild few days discussed here, the fed funds market appears to be settling down. The standard deviation of fed funds trades is a small fraction of what it was during the height of the liquidity crisis, and the weighted average (effective) fed funds rate is pretty close to the target (data). Calculated Risk has some charts.
There was no "stealth cut". What we saw was a function of a few very low trades when the Fed injected large amounts of liquidity. The injections were large enough so that at the margin its value was zero--and it was priced accordingly. (Micro level data on this would probably be quite illuminating, but I don't believe it is publicly available.) That's not a bad thing to do when people are in the state that they were in. But now that portfolios have adjusted and cooler heads are prevailing, they've removed the slack. Back to, mostly, business as usual.
And there were no real surprises in the minutes from the last FOMC meeting, nicely summarized by the Wall St. Journal. Yes, they acknowledged the possibility that policy action might be necessary if the worsening financial conditions threaten economic growth. Yesterday's consumer confidence numbers notwithstanding, it is not yet clear that we are at that stage. The possibility of a rate cut before the end of the year is not out of the question. But a cut on September 18 is not a foregone conclusion. CBOT Binary Fed Options are saying it's about 2 to 1 odds that they will ease.
But with the meeting three weeks away, you can be sure that a number of events will cause those odds to fluctuate a bit before (maybe) converging toward something we can (almost) count on. Stay tuned.
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