Friday, September 07, 2007

The LIBOR Puzzle

At a conference dinner last night, a prominent economist posed the following puzzle: Over the past month, the Fed funds rate is unchanged (and is expected to fall), the discount rate is down, and the Treasury bill rate is down, but the LIBOR rate is up. Why?

A related question: We usually evaluate the stance of monetary policy with the Fed funds rate. But when LIBOR and Fed funds become unhinged, as they seem to be now, on what basis are we to choose between them?

No definitive resolutions were offered. Post your answers in the comments section.