The effective federal funds rate as of March 16 was 0.20%, matching the reading of the previous day.  The spread between the upper limit of the target federal funds rate and the effective federal funds rate has been a subsidy that the Fed enabled to allow banks to earn a few basis points to strengthen their balance sheets.  This opportunity to borrow in the federal funds market at the effective rate and earn the target rate by depositing at the Fed is gradually vanishing.  The effective federal funds rate has hovered around 11 and 13 basis points in the October 2009-February2010 period.  In the first two weeks of March it moved up to 15 basis points.  It appears that the effective federal funds rate is heading toward the upper limit of the target rate in the next few weeks.  The main implication is that the Fed is removing another accommodative emergency measure.

 

Lower Energy Prices Account for Dip in Wholesale Price Index

The Producer Price Index (PPI) of Finished Goods fell 0.6% in February, following a 1.4% increase in the prior month.  The headlines of the past two months reflect the swings of the energy price indexes, which is a 2.9% drop in February and a 5.1% increase in January.  In February, lower gasoline prices (-7.4%) were responsible for 90% of the decline of the energy prices according to the Labor Department.  Food prices increased 0.4%, marking the fifth consecutive monthly gain.  Excluding food and energy, core PPI edged up 0.1% in February.  On a year-to-year basis, the PPI of finished goods has moved up 4.4% in February, while the core PPI, which excludes food and energy, rose 1.0%. 

 

At the earlier stages of production, the intermediate goods price index was up 0.1% and the core intermediate goods price index posted a 0.9% increase.  The upward trend of the year-to-year change of the core intermediate goods price index should be viewed with caution because it has lost its link with core consumer prices in recent years. 

 

Housing Market Update: Mortgage Purchase Index

Housing market news has been grim in the past two months, despite attractive mortgage rates and the $8000 first-time home buyer tax credit program.  The Mortgage Purchase Index of the Mortgage Bankers Association fell slightly to 221.5 during the week ended March 12 from 226.8 in the prior week.  The Mortgage Refinance Index declined to 2649.1 from 2669.0 during the same period.  The Mortgage Purchase Index has failed to move up meaningfully in the first three months of 2010.