This week I would like to introduce to readers the attached chart showing developments in the money market in the US. It clearly indicates the severity of the dislocation generated last summer by the sub-prime housing problems in the US and its on-going effects. There are a few aspects worth noting:

(1) The amount of money provided by the Federal Reserve through open-market operations has been increasing continuously since the crisis broke in August last year. The outstanding amount has grown from less than US$30 billion to over US$200 billion, with the increase being particularly sharp in March, although we have seen early signs of stabilisation.
　
(2) The appetite of the financial system for liquidity support seems to be insatiable and gives the impression that the liquidity problem has intensified, very much in contrast to the signals implicit in the recovery seen in the credit and equity markets (not shown in the chart).
　
(3) Also in contrast to the increasing demand for liquidity are the seven cuts in the Fed funds target rate by a total of 3.25 percentage points from 5.25% to 2%, underlining the severity of the liquidity problem.
　
(4) The persistent divergence of the interbank offered rates, measured by the one-month LIBOR, from the Fed funds target rate showed signs of widening in March and April, indicating unusual concerns among banks about each other's credit-worthiness.
　
(5) There has also been much greater fluctuation in the Fed funds effective rate around the Fed funds target rate, indicating either the difficulty of targeting the Fed funds rate precisely during stressed conditions or a greater willingness of the Fed to tolerate deviations.

It remains to be seen when this chart will show a return to normality. The authorities are obviously working towards this goal. There is considerable international support for these efforts as the risk of contagion through financial channels is always there and perhaps increasing, given the possibility that the economic and trade channels may reinforce the contagion. I certainly hope that the necessary liquidity support to the system, measured by the outstanding amount of open-market operations by the central banks, will peak soon and come down more quickly than it went up.

Joseph Yam
Chief Executive, Hong Kong Monetary Authority