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Do the Fed's Rate Cuts Still Have Juice?

Jose Lopez at the San Francisco Fed takes a look at the Fed's power to influence a wide variety of market interest rates and finds that, despite improving economic conditions, the relationship between the fed funds rate (the rate the Fed controls) and other rates is still broken.

The following chart from Lopez's analysis shows the pre- and post-crisis movements of the inflation-adjusted fed funds rate (blue line) and an indicator for 13 different market rates (red line):

The disconcerting thing about this picture is that the gap between the funds rate and market rates is wider now than at any time during the crisis. Lopez also points out, however, that maybe we should be happy with the overall amount market rates have fallen:

In June, the difference between the two series was almost 3.50 percentage points. This indicates that credit market tightness continues to offset a large proportion of the monetary policy easing put in place since September 2007. Alternatively, one could argue that the unconventional policy actions were required to achieve as much credit easing as suggested by the market-rate indicator. This analysis cannot distinguish between these alternative explanations clearly, but it does show that current credit market conditions are quite different from their historical relationships.

Still, the message I read here is that we're pretty far from seeing the Fed implement its exit strategy.