What is Liquidity?

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Adding Liquidity to the Financial Markets
Chart of the Week for August 24 - August 30, 2007 -

Last Friday, the Federal Reserve Board (Fed) surprised most investors by lowering its target Discount Rate from 6.25% to 5.75% in an effort to calm higher than normal volatility in the financial markets. The Discount Rate, which is the interest rate the Fed charges to commercial banks and depository institutions on short-term funds, is a tool the Fed may employ to influence the liquidity and cash readily available to banks. Banks and depository institutions are sometimes required to borrow funds from the Fed to meet short-term shortages in liquidity caused by internal or external disruptions such as increased volatility from subprime mortgages.
The chart above reflects the Federal Reserve Board's decision to lower the Discount Rate 0.50%, which is one of two key rates controlled by the Fed, the other being the more commonly known Federal Fund's Rate. In the last two weeks alone, the Federal Reserve has injected over $80 billion into the banking system through its open market operations and cut the Discount Rate in an effort to restore order to the markets by adding liquidity and making it easier for large and small financial institutions to borrow money.__._,_.___

Neither the TSP Strategy group, nor individual members like myself, are licensed or authorized to provide investment advice. Any statements made herein merely reflect the personal opinions of the individual group member. Please make your own investment decisions based upon your personal circumstances.