The federal reserve has officially lowered the effective interest rate to a rock-bottom low of between zero and 0.25%, citing the crumbling economy and lessening threat of inflation as justification.
The amount comes as a bit of a surprise, as most people didn't expect the rate to go any lower than 0.5%. No end in sight, either. Looks like rates are going to stay near the floor indefinately.
In response, of course, many banks are also dropping their prime rates.
I know many on Wall Street are thrilled with the decision, but I'm wondering if others are concerned that bringing the rate so low leaves little wiggle room should the need arise to lower it again. Thoughts?
thanks for reposting the news here... none of us on this site have CNBC or other sources for this news so thats great.
IBNutz, no need to get your panties in a bunch. She posted it to generate discussion. This is a discussion board and the piece of news is pretty historic given that the level is now the lowest ever. 0-0.25% ...
The question is after all of the bullets of monetary policy are used, what other power does the Fed really have? They've already been injecting hoards of cash into the economy, a big chunk of the bailout funds are already in the banks coffers...
More government spending? infrastructure programs? more debt? yikes... cut taxes?
scary times.
Dropping prime rates is a good thing, and getting lending going again is also not bad. But if the biggest positive we can find here is that banks will resume lending money (isn't that what they are supposed to do?), then we are in for in interesting decade. Just talk to our Japanese counterparts.
(http://deltahedged.com/)
not really a bullet, more like a machine gun with infinite bullets. the effects of interest rates dont just try up overnight, they are maintained over the life of the cut
OH, I thoguht a discussion board was a good place to post an opinion about something that had happened in the news and let that get discussed, but I guess for those who can't formulate their own opinions then there's always posting info directly from other sites as your opinion.
And thanks for pointing out the "historic" nature of today's events. I bet you came up with that label on your own.
IBNutz, you win - you are truly hilarious. i'd love to hear your thoughts though. seriously. you have no opinions on this move? you don't think the Fed has blown its load too early?
Once we get the second wave of foreclosures coming (which will include plenty of Prime, not just Subprime ARMs) in 2010, I think we'll look back on today as a desperate last attempt to stave of a prolonged recession. My point above is to try and guess what the next move is to try and jump-start the economy? The primary tool for monetary policy is gone. I know there is talk of this massive "stimulus" package, but is that our last hope. How likely do you think it is that we'll head into a depression?
What about inflation? or do we not have to worry about that since oil prices are low enough now. I'd love for you to inform us with your opinion...instead of getting angry at someone posting a relevant and yes, historic (thank goodness for my handy thesaurus) event.
Thanks, Patrick
ps - one last thing, nobody forces you to read WSO. i promise.
and to contribute the intellectual side of this thread....
the fed has so many more powerful tools in its belt than lowering rates another quarter of a point. the market doesn't care about the actual fed funds rate... what the market cares about is the fed's willingness to do "anything necessary" to pump the economy. I think the huge jump today is directly attributable to the one sentence in the fed release where they mentioned being willing to buy MBS.
so you think they're ability to print more $s (and further devalue the dollar) can get us out of this mess?
I don't necessarily disagree with the move today, I just don't feel like the time was right to drop it so far all at once. There is a huge psychological component to the market (and overall economy) and there is so much more shit ready to hit the fan in 2009. (in the form of more foreclosures to start)
The guy on 60 minutes that talked about the alt-A and prime mortgage defaults coming didn't disclose his assumption regarding default rate projections. What I mean, is that his charts weren't built with the assumptions that fixed rates would get down to below 5% (which allows most ARMS to refi below their current short term fixed rates) and that the government would start buying MBS. Thus freeing liquidity from the insitutional side of the equation. Therefore, I don't think the coming "second wave" of foreclosures will be as bad as some say because of what the fed is doing (buying MBS and forcing rates for mortgages (refi) down.
Inflation... could be a problem (will be a problem is more like it). However, we can't worry about inflation when we have a financial system that almost broke down. First things first... get money flowing (get yield spreads down and reduce market volatility/fear). Then deal with the secondary effects of the actions that fixed the system. Yes, inflation will hurt... but not as bad as >12% unemployment would hurt.
And as far as calling interest rate policy the fed's primary tool for the economy.... I'd argue that it is the least important tool they have right now. The balance sheet of the fed is much more powerful than the open market operations adjust short term rates. Again, I think the markets are up so much today because of the committment of that balance sheet, not the lowering of rates by less than .5 (effectively since rates were really below 1.0 anyway on a real basis since treauries are in such demand right now).
I think the drop today was necessary to lend validity to their comment that they are willing to do anything to turn the economy around.
If they come out and say they will buy MBS and they say they will do anything but they don't drop rates very far (And considering that the effective rates were below the target rate anyway) then people would say they are just saber rattling and not really committed... now... there is no doubt... they are going to do everything they can to avoid the great depression and then they will deal with inflation later.
I think the markets like that. They markets like the expansion of the balance sheet. Yes, it will lead to inflationary pressures but in the end that is all relative and if you have a great depression scenario in europe and asia as well and then everyone reflates together then inflation won't be quite as big of a deal as it would be if the reflation was uneven worldwide. Just my opinion. I'm sure Art Laffer would have a hay day with my comment.
I didn't see that 60 minutes but at my old PE fund we invested in a mortgage foreclosure processor (good timing). I would track the various default rates across certain states and the whole US and while I think we are ~1/2 way through the mess in relation to foreclosures, unless things change significantly, I see many more foreclosures in 2009 (as high as 2008). The really scary part (this past summer) wasn't seeing how many actual foreclosures were taking place, but how many people were falling behind on their mortgages...the bubble was MUCH bigger and even if a small percentage of these people lose their homes, we will be seeing record levels sustained in 2009.
The perfect storm still hasn't flushed out many people who are underwater on their mortgages. Many homeowners did not get into trouble until mid to late this year and it can take 4-12 months (or more) to go through an entire foreclosure process (depending on whether the state has a judicial or non-judicial status -- it can get tied up in the courts for much longer in "judicial" states).
Also, in certain states many of the courts have such a backlog of these foreclosure filings that I think the cases will remain elevated throughout 2009 and even into early 2010.
My point is I wouldn't readily dismiss the "second wave" as rhetoric. Yes, the FED is buying up MBSs ...but to say "buying MBS and forcing rates for mortgages (refi) down" will help soften the blow I think is a bit naive. The infrastructure to deal with all of these buyers and help refi or rework the loans just isn't there. The Banks are trying but each individual loan takes time and there are millions as risk...the man-power is just not there to make a meaningful dent in my opinion (on the refi front).
I can see that point regarding refis. But these ARMS were built to be refi'd so the banks planned to make money 2,3, and 5 years out from origination on refi.
The good thing about Alt-A and Prime mortgages is that the homeowners typically have more means by which to refinance (like a job or some cash). So that's good.
I don't deny that there are still a ton of defaults out there. But I think the issue is the value of those pools of mortgages and the value at which MBS trade right now (or recently) has fire sales and worst case scenarios built into the prices. If those value come up due to a reduction in foreclosures (no matter how small the reduction is) then the value of the pool will rise causing banks to be able to free up some balance sheet which will spur more lending whice will cause more capital to become available which basically starts to unwinde the shithole we have gotten ourselves into.
I think it only takes a small improvement in the foreclosure outlook to start (maybe slowly) reversing the downward spiral we are in (opposite of the positive spiral I just speculated about).
Maybe I am naive, but I just think that a scenario worse than what we will actually endure has been priced in to a lot of assets out there and when the fear dissipates from the market and assets get marked up in price then the influx of liquidity and the cash on the sidelines will turn this ship around. Then at that point we'll have to worry about inflation and worry about it in a serious way.
Is that you in your image? I'm concerned that the fed lowered rates prematurely and I sure hope they have some better ideas for the problems that await we in 2009 and 2010. But im even more concerned about how those legs look in a pair of Prada pumps =)
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