This just in from the Fed...
The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.
Yep, that's the great Discount Window that charges a 100bp premium over FF.
There is a rationale for that. It helps to ration the funds by price. In the old days (which were not that long ago), the discount rate was below the funds rate but there was more of a stigma attached to borrowing. (Rationing by stigma?)
That said, I did mention a few posts ago that it might not be a bad idea to lower the discount rate, at least temporarily, but not change the funds rate. It's a liquidity issue, not an interest rate issue, as the person on CNBC said, and I agree. But lowering the discount rate might relieve even more pressure.
I wouldn't do it today because it might incite more panic. But I'd look for an opportunity.
The classic advice for a central bank in a liquidity crises is to lend freely at a penalty rate.
Thus spake Bagehot (and more recently Willem Buiter).
http://maverecon.blogspot.com/2007/08/if-theres-credit-crunch-leave-fed-funds.html
I totally agree. The penalty could stand to be maybe a little less than a full percentage point. Half a point would get the point across. However I doubt they would do it anyway. My point is more that IF the discount rate had been a little lower (say 5.75%) going into this, MAYBE more of the pressure would have been relieved at the window and the size of the open market operations could have been smaller. We'll never know.
Perhaps by early next week we'll get a sense for how much discount window borrowing there was. I'd mostly be interested in how much is borrowed at the close of the day today.
Can you drop me a note, or tell me how to contact you please?