Notes on the Federal Reserve's Current Actions
links for 2007-08-26

Jim Hamilton: Latest Economic Indicators

Jim Hamilton writes:

Econbrowser: Latest economic indicators: New home sales picked up in July, and new orders for durable and capital goods grew strongly. But that was then and this is now.... [T]he seasonally unadjusted drop in home sales from June to July was more modest than might be expected in a typical year. Even so, it's unquestionably still been a pretty bad year.... On the other hand, there's no denying that today's numbers for manufacturing orders from the Census Bureau were quite strong. New orders for durable goods were up 5.9% within July alone.... But all these numbers predate the fun and games in financial markets of the last two weeks, which continued yesterday with more Fed injections to the tune of $14 billion in 12-14 day repurchase agreements (meaning those reserves will come back out of the system in two weeks) and $3.5 billion in overnight. This again came on a day when the effective fed funds rate ended up at only 4.88%, confirming that the Fed is not currently targeting the effective fed funds rate. It's also interesting that the recent trend in which there is a huge range of prices at which fed funds get traded each day is continuing....

One interpretation consistent with all this is that there are two sets of banks, one of which, despite the high level of excess reserves in the system, needs to offer over 5% to obtain funds, and the others which could usually borrow at a much lower rate. The goal of the repeated reserves injections is perhaps then to keep the former from paying too much over the 5.25% "target". That would also be consistent with the otherwise mysterious decision of four big banks to borrow 30-day funds from the Fed at 5.75%.

And it also suggests that the liquidity crunch for such institutions is far from over, making it difficult to expect today's good news on home sales and capital goods orders to be repeated next month.