US Fed Funds Rate Cut 0.5%

The "federal funds" market is the inter-bank overnight loan market.

Banks in need of funds borrow from each other in this market.

The Federal Reserve System has an influence over the interest rate in this market through its ability to influence how much money the banks have to loan each other.

The Fed, by buying securities from member banks, can make them flush with cash for such lending operations.

Conversely, the Fed, by selling securities to the member banks, can dry up the supply of such loanable cash.

This is from Bloomberg:

The Federal Reserve lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years, hoping to keep the U.S. from sinking into a recession sparked by fallout from the housing-market collapse.

"Fed Lowers Rate to 4.75 Percent, First Cut Since 2003 (Update3)" by Scott Lanman and Craig Torres. 18 September 2007

It appears to me that the dollar is selling off right now (7:50 GMT) on this news and precious metal prices are going sharply up.

Sterling up 1% today at 2.1012

Now put yourself in the position of non-USA central banks and other financial institutions holding substantial amounts of dollar-denominated assets as they watch their investments melt down.

Would you, in that position, be willing to keep accumulating dollars or would you give serious thought to selling what you already have?

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