Last week, a couple of days before Americans closed up shot to celebrate America's birthday, something funny happened in the Fed Funds market. According to data from the New York Fed, the borrowing rate on the overnight market on June 30 -- the end of the second quarter for most firms -- hit 7.0 percent, a huge divergence from the recent range of about zero to 0.25 percent. The Fed Funds rate hit the seven percent mark twice during the fall of 2008: first, after Lehman Brothers filed for bankruptcy in September, and then in October when the stock market dropped nearly 20 percent in one week. But there were no such market moving events this time.
The daily Fed Funds rate, which indicates what banks charge each other for overnight loans, is given in a range, and on June 30 the low end of the borrowing range was just 0.01 percent, which makes the exceedingly high top rate all the more puzzling. For the entire month of June, the next-highest reported rate was still only 0.5 percent.