Mind The Fed Funds Rate—It’s Deader Than A Doornail And Heading For Pasture

In this new environment, who’s lending in the fed funds market? Data suggest that depository institutions, which accounted for more than half of fed funds sold precrisis, now account for a relatively small share of lending activity. Specifically, bank holding companies (BHCs), standalone commercial banks, foreign banking organizations (FBOs), and thrifts represented 26.3 percent of the total lending market at the end of 2012, compared with nearly 60 percent in the fourth quarter of 2006……

FHLBs play a key role in fed funds lending, accounting for almost 75 percent of total lending in the last quarter of 2012. Financial statements indicate that, historically, each of the twelve FHLBs has participated in the fed funds market to varying degrees. As shown in the dynamic chart, the share of fed funds sold by FHLBs has increased significantly since the end of 2006, from close to 40 percent in the fourth quarter of 2006 to almost 75 percent at the end of 2012, down from a peak of 83 percent in the fourth quarter of 2010.