A few little problems with the Fed funds rate

Bloomberg reports there have been a few problems in maintaining the Federal funds rate at the central bank's desired level of 2.0 percent. Hoarding cash by a banking system now petrified by the fallout from the whole Lehman Brothers, Merrill Lynch, AIG maelstrom seems to be the source of the problem.

The rate for overnight loans between banks soared to its greatest margin over the Federal Reserve's target rate in at least a decade as banks hoard cash after Lehman Brothers Holdings Inc.'s bankruptcy.

Fed funds traded as high as 6 percent, or 4 percentage points above the Fed's target, according to ICAP Plc, the world's largest inter-dealer broker. The difference is the greatest since Bloomberg began tracking the data in 1998.
The central bank uses repurchase agreements, or repos, to temporarily buy or sell Treasury, mortgage-backed and so-called agency debt for a set period, to help maintain enough money in the system to keep overnight interest rates close to the target. They don't signal a policy shift. Futures show traders boasted odds to 54 percent that the Fed will cut rates when policy makers meet tomorrow to offset financial market turmoil.

``If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent,'' said Stan Jonas, who trades interest- rate derivatives at Axiom Management Partners LLC in New York.

That would probably be a bad thing.