The U.S. Federal Reserve has cut its key interest rate by over 3/4% in an desperate effort to defibrillate the U.S. economy.
America’s policy rate is now practically 0%. Meanwhile, the Fed is also printing money around the clock to stimulate spending.
In a statement, the Fed said that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” (You don’t hear grim long-range forecasts from the Fed very often.)
A lot of people are now finally starting to realize how bad things are getting for the U.S. economy. The Fed has cut rates an unprecedented 10 times in the last 15 months.
The Bank of Canada (BoC) is obviously watching all of this closely. Many think they’re getting ready for another rate cut on January 20. If so, that would be a boon for variable-rate mortgage holders (assuming banks pass along the cut). Canada’s key policy rate is currently at 1.50% so there is room for the BoC to drop more.
In the bond market today, the yield on 5-year Canada bonds broke the 2% barrier for the first time in memory. The 5-year now stands at just 1.93%. As a result–barring a rebound in yields–fixed mortgage rates may drop further this week or next.
Please help me understand this. So the Fed has effectively made their rate 0%, even though in all reality it was already at 0% even before the announcement…I guess now it is just official. Now, they did this to increase lending, however please explain to me this…why would any bank in the U.S. lend money to home owners, entrepreneurs and small businesses when faced with a huge recession at a minimum and likely a depression, when they can borrow money from the fed…now for free and put it somewhere safer and make money for nothing.
I do not see how this is supposed to help create liquidity. If you look at M1 money multiplier the banks simply are not lending any money…all new money that had been given to them…they are hoarding.
http://globaleconomicanalysis.blogspot.com/2008/12/huge-demand-for-treasuries-as-banks.html
Absolutely amazing IMO. There’s not much they can do when growth is non-existent, I just think that its only starting down there and consumers are going to take a long nap for the winter & early spring.
Deflationary economy is worse than anything since people tend to wait on the sideline which could cause the entire economy to halt. In normal economy, printing money causes inflation which is not desirable, but in the economy condition that we are in right now, printing money will help the economy growth and ease the root cause of the crisis, housing market.
Ryan, You’re right that the Fed’s target rate cut is somewhat symbolic for now. Their other liquidity measures will have an impact as well, however.
To your other point, I’m not sure where banks would invest overnight funds and make money for doing nothing. I do know that Americans will eventually grow tired of making 1.33% on a 5-year treasury and start taking on risk again.
Cheers,
Rob
The scary thing is 1.33% is far better than lending to defaulting homes and businesses that are closing up shop. If we keep seeing all this deflation, whether it be job losses, housing falling, salary freezes…you name it…1.33% starts to look good in all that mess.
I will take a deflationary economy over stagflation any day.
Hey Ryan, Agree that 1.33% does look good today, which is why 5-years are paying that rate. Things will change over time though. The amount of “time” is always the question. Most economists now seem to think 2009 will be a write-off economically, so cmon 2010… :|
Rob or Melanie
I’m just wondering about why banks “advertised” rates are still at 6.65 percent. It makes no sense to me. Bond rates are at 1.8 percent! That is a 4.8 percent spread. Isnt that double normal?
Thanks
Mary
P.S. I love the site!