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With Wall Street begging the Federal Reserve to cut the Fed Funds target rate, few have noticed the effective rate already has been lowered, triggering what could be the beginning of an unprecedented worldwide dollar sell-off.

Econometrician John Williams documented in the most recent newsletter on his Shadow Government Statistics website that in the 11 trading days since the Fed has cut the discount rate, the effective Fed Funds rate has averaged 4.84 percent, ranging 25 to 50 basis points below the official 5.25 percent target rate.

The Fed Funds rate is the rate at which commercial banks may borrow excess reserves from one another. It is considered the key rate index set by the Federal Reserve Open Market Committee, or FOMC.

The minutes of the Aug. 7 FOMC are due to be released tomorrow and are certain to be scrutinized by Fed watchers for indications of the future direction of movement in Fed Fund target rates set by the committee.

Currently, Wall Street is begging for a rate ease as a return to the easy credit policy that fueled the credit markets in real estate, commercial paper and leveraged buyouts.

An unprecedented strategy of widely available easy credit has stimulated world stock markets to a string of record highs since 9/11, with the Dow Jones Industrial Average reaching a peak of more than 14,000 July 19.

To stabilize the Dow’s 1,000-point drop since then, the Fed literally has printed money.

Williams estimates central banks around the world, including the Fed, have infused $1 trillion in the global banking system during the last two weeks.

While the European Central Bank has been raising rates, the drop in the effective Fed Funds rate and the reduction of the discount rate pushed the dollar down Friday to $80.68 on the U.S. dollar index, ending a brief rally that had begun in the prospect the Fed would hold rates in the face of a sell-off.

The Fed is in a dilemma. If it lowers the Fed Fund target rate, the dollar will suffer on world currency exchanges. A dollar sell-off will trigger a new stock market sell-off.

If the Fed holds or raises rates to support the dollar, it will almost certainly prompt a massive stock market sell-off.

Either way, the stock market in September and October is likely to drop below 13,000 and begin testing a new support level at 12,000.

Bob Chapman, whose International Forecaster newsletter reaches an international audience of about 100,000 subscribers, estimated in his Aug. 25 newsletter that his reconstruction of M3, an important index of the money supply, has been rising at a historically unprecedented rate of over 13 percent.

WND has reported the Fed simply stopped publishing M3 data after issuing a technically worded March 2006 announcement.

Not publishing M3 data has allowed the Fed to print money to infuse billions of new liquidity into the market following the 1,000-point August Dow decline in the current worldwide credit meltdown of real estate foreclosures and multiple forms of bad corporate debt that was allowed to be created by rating agencies that drastically underestimated risk.

Chapman agrees the dollar is at risk, writing in his current newsletter, “If Fed Chairman Bernanke cuts prime interest rates he will be abandoning the dollar, whose value will fall against other currencies and gold.”

Chapman believes the current credit meltdown in the U.S. is headed toward a recession.

He notes, “Since the beginning of August, 25,000 workers nationwide have lost jobs in financial services. Since the start of the year, 40,000 have lost their jobs at mortgage institutions. We are told 20,000 have lost jobs in construction.”

Even illegal aliens have been hurt, Chapman notes, writing, “In the last year, 200,000 illegal aliens have lost their construction jobs. This is far worse than in the airline industry in 2001, when 100,000 lost their jobs. We are talking about massive layoffs.”

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