Press Coverage of the Fed Action

Greg Ip, of the Wall Street Journal, the most eminent of the Fed watching journalists writes, "Officials said reducing or eliminating the spread between the discount and federal funds rate could have drawn an unlimited and unpredictable amount of borrowing, and caused banks to completely abandon the Federal funds market. That would cause the funds rate to plummet and make it hard for the New York Fed to get it close to the target rate chosen for monetary policy purposes."

Imagine that. The unsecured lending rate between banks much below the collateralised rate for lending by the Fed. Why would the unsecured rate be much lower than the secured rate? Are the discount window requirements in terms of counterparty, collateral and margin so lax that banks would pay more to borrow with this collateral than they would to borrow unsecured? If so, that's a story worth telling. If not, perhaps Mr. Ip's sources have it backwards.