Federal Funds Rate Soars to All-Time High of 100%

Just when it is trying to make credit more readily available to revive the economy, the Federal Reserve found itself battling a surge in interest rates Thursday after a key short-term rate hit an all-time high of 100%.

The Fed rushed to pump money into the banking system after a year-end dash for cash by banks sent the overnight federal funds rate surging, with some banks paying up to a record 100% Wednesday. That was nearly 15 times the 7% level that has prevailed recently. The federal funds rate is the level at which banks lend money to one another for short-term loans.

Analysts pinned the shortage of federal funds to self-imposed restrictions by banks on which banks they will lend to and how much they will lend. They said worries about stability in the banking industry is putting extra pressure on banks to show more cash in their end-of-the-year balance sheets.

Kathleen M. Camilli, chief economist for Maria Ramirez Capital Consultants Inc., said it was the most severe funds shortage since the end of 1986. “The Fed wanted to notify banks it would be providing enough liquidity,” she said.

In addition to “pre-announcing” that it would supply cash to the nation’s banking system on New Year’s Eve, the Federal Reserve pumped cash into the money markets 1 1/2 hours earlier than is typical and purchased Treasury securities from dealers. By buying Treasury notes and bills, the Fed injects more cash into the banking system.

“The fact that they came in early was a signal that the funds market got out of line,” said David Wyss, chief financial economist at DRI/McGraw Hill. “They’re trying to calm the market down.”

The intervention brought the rate down to a more moderate 10%, but that was still well above the Fed’s target of 7%.