Conglomerate Blog: Business, Law, Economics & Society

October 08, 2008

The Rate Cut

Posted by Gordon Smith

Central banks around the world -- even China! -- are cutting interest rates. So what exactly is supposed to happen now?

Bankrate senior financial analyst Greg McBride has a nice analysis of the implications of the rate cut for consumers. His bottom line: this hurts savers (lower CD rates) and doesn't incite new borrowing, but helps some people who have an adjustable rate mortgage. Hmm.

Most of the talk about the rate cut looks like this from Don Rissmiller, of Strategas Research Partners in New York: "A coordinated rate cut is symbolic as much as anything else. It's the most traditional tool that central banks have at their disposal, its readily understood by everyone in the markets, and by deploying it, they therefore hope to instill confidence."

Instill confidence. That is the mantra. Watch David Wessel of the WSJ ...

So if everyone believes that the rate cut is mostly symbolic, why would we think that it should instill confidence?

No need to answer that. It's a rhetorical question. Just note that the rate cut didn't stop markets around the world from sliding further. FT sums it up nicely: "Markets shrug off rate cut."

UPDATE: I posted this, went to get some lunch, and came back to find that the market has done an about face. CNBC commentators are speculating that stock traders are seeing some hopeful signs in the credit markets.

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Comments (4)

1. Posted by fedgovernor on October 8, 2008 @ 11:33 | Permalink

"This hurts savers ..."

Correct! I am being incentivized to take my money out of the bank. If everyone did the smart thing, and did what the Fed apparently wants us to do, and takes our money out of the banks ...

Isn't that a bank run?

2. Posted by fedgovernor on October 8, 2008 @ 11:36 | Permalink

Incidently,

Nobody's adjustable-rate mortgage is pegged to the discount rate, or to the FedFunds rate.

Almost all of them are pegged to the 1-year Libor or 3-month Libor.

The 1-year Libor and the 3-month Libor may eventually go down as a result of looser monetary policy, but the aim appears to be to take interest from good citizens (savers) and give it to bad citizens (debtors).

Sort of makes you wonder, doesn't it?

3. Posted by fedgovernor on October 8, 2008 @ 11:47 | Permalink

So, summarizing Wessell:

1) Savers hurt by Fed

2) Credit card borrowers won't see any benefit

3) Home equity borrowers won't see any benefit (since those lines of credit have been closed).

4) Libor has jumped over the last 30 days by 150 basis points. The fed cut 50 basis points. Net: up 100 basis points. Thus, "you're still looking at a big payment increase."

Are you filled with confidence yet?

Or are you filled with dread?

4. Posted by Hanstaruna Invest Tools on October 9, 2008 @ 0:56 | Permalink

in my view, interest rate cut doesn't have effect in short run, but in long run, i hope it will.