Fed Funds Update

Just before I went on holiday on August, I offered up a cheeky chart of the Fed funds rate, suggesting that the Fed had stealthily cut rates between meetings. (This was before it actually cut the discount rate.) Greg Mankiw resurrects the meme today, noting that the Fed funds rate for August as a whole was 5.02% – essentially a quarter-point lower than the official target rate of 5.25%.

So here's an updated version of the chart, showing what's really been happening to the Fed funds rate of late.

Messy, eh?

It seems to me that the Fed has much more important things to do right now than fiddle about in the overnight markets trying to ensure that the Fed funds rate always ends the day within a basis point or two of the target rate. And given the general screwiness at the short end of the curve, a bit of volatility here is only to be expected: trying to keep this number in a very narrow range would probably be impossible in any event.

It almost seems to obvious to mention, but the target Fed funds rate is vastly more important, especially at a time like this, than the actual Fed funds rate. If and when credit markets calm down a little, then we can start worrying about whether the Fed is hitting its target.