Alan Greenspan in 2005 spoke of a conundrum ("long-term interest rates that have remained low and even fallen despite the Fed’s yearlong campaign to raise short-term rates." MSNBC http://www.msnbc.msn.com/id/8148664/)
Read the first two paragraphs from an article in today's WSJ (I'm adding emphasis):
"The Federal Reserve escalated its efforts to alleviate strained credit markets by announcing dramatic increases in the amount of cash it will direct specifically to the banks and markets that need it most.
The action doesn't alter the Fed's current target for short-term interest rates, now 3%, although the Fed is likely to cut that later this month in a separate action. Rather, Friday's moves are aimed at overcoming a reluctance among such institutions to lend to each other which is making it hard for some banks to actually borrow at that 3% rate."
After a while, it begins to make sense: banks are scared of doing anything, and in not lending to one another they can not turn around and borrow from the Fed.
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