Liquidty Trap Watch

Two days ago, Krugman said, “the one-month Treasury rate was 0.57; the three-month rate was 0.825” and he worried about a liquidity trap.

Then then Fed cut the discount rate 0.75%, to a low low 2.25 %. Would the T-rate crater? Apparently not.

This morning, Krugman says, the one-month T-bill rate is 0.539, the 3-month rate 0.728. Working the math out on my thumbs suggests that the change in the T-rate was a lot smaller than the cut in the discount rate.

I think this is actually sort of good news. It seems that although the Fed is running out of ammo, there's still a little elbow room left….

Update: for a gloomier view, see Calculated Risk, Financial Crisis: Third Wave Still Growing.

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