Interest Rate Roundup

Tuesday, October 07, 2008

Bernanke speech focuses on economic weakness, opens door to rate cut

Fed Chairman Ben Bernanke is giving a speech before the National Association for Business Economics (NABE). His speech focuses largely on economic weakness. This clearly opens the door to a further interest rate cut, though a natural question to ask is "So what?" If loaning Treasuries and cash against hundreds of billions of dollars in lousy commercial and residential mortgage securities and other paper hasn't worked ... if agreeing to buy an unlimited amount of commercial paper hasn't done much ... if lending tens of billion of dollars to AIG hasn't stopped the market from worrying about the health of other insurers ... and if cutting the funds rate ALREADY -- from 5.25% to 2% -- hasn't worked, you have to wonder what cutting the funds rate even further toward zero would accomplish.

We'll see how markets react over the next several hours. And here's a brief excerpt from Bernanke's speech to keep you busy as you watch the ticker go by:

"As you know, financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets. The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets. Even secured funding has become expensive and difficult to obtain, as lenders worry about their ability to sell collateral in illiquid markets in the event of default. In addition, many securitization markets, such as the secondary market for private-label mortgage-backed securities, remain closed or impaired.

"Considerable experience in both industrialized and emerging economies has shown that severe financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked. For this reason, the Federal Reserve, the Treasury, and other agencies are committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical economic functions. Recent actions by the Congress have given the Treasury new tools and resources to address the stressed conditions of our financial markets and institutions. The Federal Reserve has also been granted a new authority, the ability to pay interest on bank reserves, which will allow us to expand our lending as needed to support the system while better managing the federal funds rate. These tools will provide important additional support for the government's efforts to strengthen financial markets and the economy."

This is the quote that hints at a possible rate cut, incidentally:

"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

2 Comments:

  • My guess, the way this whole melt down has been managed. They will cut the rates when the short ban is lifted effect Thursday. I am guessing but it would not surprise me.

    By Anonymous Anonymous, at October 7, 2008 at 2:24 PM  

  • Ben will soon run out of bullets to keep this economy going.

    By Anonymous Anonymous, at October 7, 2008 at 4:32 PM  

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