Fed Action Coming; LIBOR Targeted?
A: Breaking news to be released soon. As I said yesterday, I admire the move the fed did yesterday to regain control over the tradable markets' expectations, and to setup a situation that will allow for more surprising action with the saved ammunition. It seems a co-ordinated effort with International central bankers is underway to help the credit markets and specifically the LIBOR rates which have drifted to a 85 basis point spread from fed funds rate. That widening spread is a clear signal of distress in the credit markets showing that banks are risk averse in their lending habits. By now, most know the importance of the LIBOR rate (which has surged in the past 4 weeks while the credit situation deteriorated) as that is the rate many adjustable mortgages reset to. Getting LIBOR back in line, within 10-12 basis points of fed funds rate historically, should be a top priority to soothing the pain in the credit markets and ultimately for consumers.
Yesterday, in my post I stated:
In my opinion, this move was the fed's way of regaining control over the tradable markets by not delivering what was hoped for, while at the same time taking some action. I admire this move because it removes a level of expectation from the markets and could set up a surprise move down the road; when it may be needed more.Today, the tradable markets are waking up to this concept and the breaking news soon to be released confirms it. As for LIBOR, here is what the credit sensitive rate has done in the past few weeks compared to the fed funds rate:
Notice how 3-Month LIBOR remained above 5% while the fed funds rate was cut down to 4.25%! The spread between the two right now is about 86 basis points! Historically and in normal credit conditions, this spread is about 10-12 basis points. It rises when credit markets are in turmoil and banks become risk averse in their lending. It's a clear sign that a credit crunch is underway; but you don't need me to tell you that.
I think the fed is working on a solution to target LIBOR and sooth the credit distress that is evident by rising LIBOR rates. Keep an eye on this as news unfolds!
Related: Credit Crisis Hits Libor Rate
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