Wednesday, October 8, 2008

Fed Funds Rate Cut By 0.5 Percent, Along With Several Other World Central Banks

In what shouldn’t have come as a surprise, the Federal Reserve slashed its Fed funds rate by 0.5 percent. What was a tad unexpected by some was that the rate cut was done in unison with several other central banks from across the world. Also cutting their interest rates were the European Central Bank, the Bank of England, the Bank of Canada, the Swiss National Bank and the Swedish Riksbank, according to MarketWatch. Chances are this won’t be the last of the rate cuts, either.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., said in a MarketWatch article, "The playbook to avoid depressions says rates need to be as close to zero as possible, banks have to be rescued, public spending has to rise and free trade must be maintained." The Fed is not worried about inflation right now; what is on their mind is growth. How are they going to get the economy rolling again and avoid a long, drawn-out recession, or even a depression? Right now, the Fed funds rate sits at 1.5 percent, so there is still some room for it to fall, and I expect it to keep coming down.

What does this all mean? The answer really depends on the banks. The Fed is taking these actions in hopes that it will help convince banks to resume lending, but thus far, their actions have done little to change the mindset of the banks. Some estimates are saying the bailout package will begin making an impact in the markets in about a month, so it is possible that a resurgence in bank lending could occur around that same time, but that is just a guess. It all boils down to trust, and right now no one trusts anyone. Will the prospect of making some extra cash give banks the push they need to take some risk? No one knows for sure. One thing can be certain, though: If this situation doesn’t get better in the next month, watch out.

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