by Calculated Risk on 11/18/2008 10:40:00 AM

Fed Chairman Bernanke testified to Congress this morning that he sees some credit market progress:

"There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks."

That is all true, but there has been no progress for the last few days.

The three month LIBOR declined slightly to 2.22% from 2.24%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (unchanged)

The yield on 3 month treasuries increased to 0.14% from 0.17%. (unchanged).

With the effective Fed Funds rate at 0.34% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed is engaged in quantitative easing.

The TED spread: 2.10, up from 2.07 (unchanged)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The two year swap spread from Bloomberg: 104.25, down slightly from 108.75 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Weekly Fed Balance Sheet (update weekly on Thursday)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread increased to 4.42 from 4.05, and down from 4.72 two weeks ago. (Worse).

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.50% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Note: The Fed's balance sheet is interesting and I'll try to have more on how the Fed is funding their initiatives and quantitative easing. See Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

Another day with no improvement ... if anything, the minor movement is in the wrong direction.