One day after the Fed cut the Fed funds target rate to the lowest in the G7, interbank lending rates in the United States eased off, according to the British Bankers' Association on Wednesday.
Overnight USD Libor pulled back 3 bps to 0.13% while the three-month Libor retraced 27 bps to 1.58%, narrowing the Ted spread by 12 bps to 155 bps, its lowest since Sept. 12, and the Libor/OIS spread by 28 bps to 140 bps, its lowest since Sept. 23.
The moves come just one day after the Fed cut rates to a target level between zero and 0.25%, going a step further than the consensus market expectation.
The Fed funds target, the rate that banks use to lend to each other via the Fed, has never been below 1%. In addition, the discount window - the rate at which the central bank lends directly to banks - was slashed by 75 basis points at 0.50%.
The Fed said it "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."
Going forward, the Fed said "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
The statement also discussed the prospects of using unconventional monetary policy to stimulate the economy. Since early September, the Fed's balance sheet has grown over $1 trillion to more than $2 trillion in total.
"As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant," the statement said.
The Fed's Open Market Committee also said it was looking at the potential benefits of purchasing long-term Treasuries in an effort to influence interest rates favourably. In addition, the Fed said it will implement the Term Asset-Backed Securities Loan Facility to extend credit to households and small businesses.
Other unconventional means of monetary policy will also be considered, the Fed said.
By Erik Kevin Franco
©CEP News Ltd. 2008