Federal Reserve slashes interest rates

J · Post by J » 2008-01-30 04:33pm

I don't think anyone really predicted that rates would fall this fast, I think the lowest estimate I've seen from any source was around 2.5-2.75% by Q3 2008. If the rate drops keep going at this speed we'll be down to 0% by then.

CaptainChewbacca · Post by **CaptainChewbacca** » 2008-01-30 04:42pm

I don't know much about economics. What is bad/good about interest rates falling?

Erik von Nein · Post by **Erik von Nein** » 2008-01-30 04:49pm

Hooray! Soon we'll be just like Japan in the late '90s! Awesome.

I love how the headline for this on the WSJ site was merely "Fed cuts rate again". Ho, boy.

Chardok · Post by **Chardok** » 2008-01-30 04:54pm

CaptainChewbacca wrote:I don't know much about economics. What is bad/good about interest rates falling?

It's the interest rate the fed charges banks to get loans from it. If it costs banks less to get money from the fed, it usually correllates(SP?) to lower interest rates on consumer/commercial loans the banks give out.

J · Post by J » 2008-01-30 04:54pm

I, for one, look forward to interest-free loans!

Oh, wait, I'm not a bank...damnit...

FireNexus · Post by **FireNexus** » 2008-01-30 04:57pm

I don't know much about economics. What is bad/good about interest rates falling?

Falling rates mean cheaper credit, specifically cheaper credit borrowed from the federal government, which actually does, unlike most times when this theory is used, end up trickling down as cheaper credit to everybody. That can be good in periods where cheap credit (thus increased liquidity) can actually solve the problem.

Problem is, cheap credit is 1. What got us into this mess, and 2. Not likely to have much effect when the major problems is a complete unwillingness or inability on the part of financial institutions to lend money.

The downside of cheap credit is that it makes the currency less valuable. If borrowing money in dollars is cheap and easy, more people will. This makes dollars more readily available, and thus less expensive when compared to other currencies (this is primarily borne out as a low yielding t-bill. When their yield sucks, everyone wants to get rid of them, making them and thus the dollar they're based on less desirable). The easy availability of cheap credit is one of the primary factors contributing to the weak dollar.

Problem is, we've been in a period of relative stagflation for a while now (stagnant or shrinking economy + inflation) and that leaves the relatively impotent fed in a bad position: Get inflation under control and hope that we can ride out the storm or that it will fix the problem, but risk that the measures you take will actually make the problem worse, or hope that decreasing the rate and risking even greater inflation will fix the economic problems, allowing us to get inflation under control when it's less painful, but still risking making the problem even worse.

There's also inaction and letting the system sort itself out, but then no matter how things turn out, they still look bad and lose at least some power through appearing impotent (which they really are).

Basically, we're in for a huge clusterfuck and there's nothing anyone can do about it. The fed just doesn't want to be the guy who didn't at least try to put the house fire out with the hose, even though the hose has a decent chance of being hooked up to a gasoline tank.

(I'm pretty sure I got that right, but if I'm missing something, someone please tell me I'm a moron and correct me.)

Stuart Mackey · Post by **Stuart Mackey** » 2008-01-30 10:23pm

Admiral Valdemar wrote:They can slash only so far. The effects are being delayed, not destroyed. For the first time, the banking system has reserves in the negative figures. Only the Fed printing money like crazy with constant Bernanke helicopter drops of liquidity is keeping the system from collapse.

As I say, the capitalist system we have is broken. Severely.

Up the Revolution!

Its not capitalism, it people living on debt. Did the US actually believe that deficit spending and credit was a viable way to run an economy? does the US populace seriously think that they didn't have to service their debts?
I don't care what nation your in, a debt is a debt and sooner of later the collector will call.

fnord · Post by **fnord** » 2008-01-30 11:37pm

CaptainChewbacca wrote:I don't know much about economics. What is bad/good about interest rates falling?

In addition to what the previous posters have said about it being cheaper to borrow, there may be a carry trade arising thanks to such cheap rates.

Namely, investors borrow in a cheap currency (eg USD, JPY), and offload the borrowed results, generating selling pressure on the currency in question, and invest them in higher yielding AA or AAA corporate or sovereign debt. The risks undertaken are interest rate risks on both ends, and exchange risk, namely the USD or JPY recovering enough to take a significant dent out of your net interest income.

I'm not sure, off top of head, how much the JPY carry trade was hurt by the Bank of Japan raising interest rates from zero.

The Grim Squeaker · Post by **The Grim Squeaker** » 2008-01-31 12:27am

Stuart Mackey wrote: I don't care what nation your in, a debt is a debt and sooner of later the collector will call.

Warren Buffet had an excellent quote on that, to the tune of "Americans can look forward to the future of paying large portions of their income to pay off their outstanding debts".

FIRENEXUS, if I might add: Lower interest rates also encourage people to spend and invest their money rather than placing it in a bank to accumulate. Cutting it makes the bank system less attractive as compared to, say, stocks.