Wednesday, October 29, 2008

The Fed Cut Rates Below 1% Two Weeks Ago

Fed Statement on Interest Rates: The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1%.


MP: The Fed cut the federal funds rate to below 1% more than two weeks ago, see chart above of the actual, effective fed funds rate since October 10 (
data here), averaging 0.83% from October 10 to October 27.


9 Comments:

At 10/29/2008 8:35 PM, Anonymous Anonymous said...

As I said before, we're suffering chronic deflation. Expect the target fed funds rate to go lower, probably zero by the end of '09.

And they're not even targeting it anyway, so why does anyone even care?

 
At 10/29/2008 9:06 PM, Anonymous Anonymous said...

btw, Even Roubini (the man who has called this perfectly since 2006), is saying that in 2009 we'll face global deflation

 
At 10/29/2008 10:36 PM, Blogger David Damore said...

Mark,
Thanks for posting the chart. Thought the announcement by the Fed today was much ado about nothing.
Have shared a link to this post on Twitter. Hope you get some traffic from http://is.gd/5bB5.
ATB,
David

 
At 10/29/2008 11:23 PM, Anonymous Anonymous said...

Can anybody explain to me what is the difference between the effective Fed rate and the nominal Fed rate?

Thanks

mm

 
At 10/30/2008 8:22 AM, Blogger matt said...

Federal Funds Rate - wikipedia

The Fed sets a target rate but must then defend it through open market operations. Depending on whether they are setting the nominal rate higher or lower they must either issue loans or buy out loans to bring the intra-bank lending market rates to the target.

My interpretation of what why the Fed has been issuing below nominal loans is a combination of a) the banks simply can't pay the interest back and b) they are trying to fight the intuitive market reaction that increased risk means increase risk premiums (higher interest rates) - and that higher rates choke off lending even more.

 
At 10/30/2008 11:54 AM, Blogger jalyo said...

Matt,

Slight change

"Depending on whether they are setting the nominal rate higher or lower they must either issue loans or buy out loans to bring ..."

the Fed is buying and selling government securities through its open market operations. They are either increasing or decreasing the supply of money into the bank thus increasing or decreasing their reserve which ultimately allows the bank to loan more or less money.

 
At 10/30/2008 12:02 PM, Anonymous Anonymous said...

Lost decade, ZIRP coming at you live. It's gonna suck when the US defaults on the debt but that is the way the cookie crumbles.

 
At 10/30/2008 11:31 PM, Blogger Arman said...

The Fed declares overnight rates, which is basically a floor for interbank accounts. THEN government securities are auctioned to banks at the lowest interest that the local banks will accept. Money is the credit of the local bank, which is why local banks can buy govern ment securities for lower interest than the lowest interest that they are paying for cash accounts.
The Fed just lowered overnight rates again, to one percent, which again makes lenders less willing to lend, and so shrinks the money supply again. The major crap will probably be manifest in about 8 days. Watch for about 30% of Dow Jones to evaporate.

 
At 10/31/2008 8:08 AM, Blogger OBloodyHell said...

> The Fed just lowered overnight rates again, to one percent, which again makes lenders less willing to lend, and so shrinks the money supply again.

That makes no sense. All they do is adjust their rates to match, so they make the exact same amount of profit off of money lent. There's no reason whatsoever why they would be "less" willing to lend. And the lower rate DOES make others more willing to BORROW, which means that more will be lent, and the money supply expanded.

As far as whether or not this expansion of the money supply is a good or bad thing, that can be debated -- but, since it's generally agreed that it was the Fed's contraction of the money supply which caused the Great Depression to be so deep and so long, it's hardly likely that the resulting expansion is going to hurt as bad as a contraction would.

 

Post a Comment

<< Home