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No. The Dow's large drop today was triggered by the Fed cutting the fed funds target rate by 25 basis points (0.25%). Stock market investors were hoping that

by ctkrohn 19y ago

No. The Dow's large drop today was triggered by the Fed cutting the fed funds target rate by 25 basis points (0.25%). Stock market investors were hoping that the Fed would cut 50 basis points, giving a further kick to the economy. However, cutting interest rates by too much at one time can make money too easy, adding to inflation pressures. I work on a trading floor at a major investment bank, and no one near me mentioned the Morgan Stanley report. My firm has been forecasting a 33% chance of a recession.

whacked_new 19y ago
Thanks for the information!
rms 19y ago
I think it's terrible that the Feds keep cutting interest rates. All it's doing is propping up Wall Street at the expense of individual citizens and the value of the US Dollar -- kind of like how China keeps the Yuan devalued at the expense of ordinary citizens. The last time the Feds cut interest rates this much, it caused a housing bubble.
- ctkrohn 19y ago
  There are certainly risks to cutting rates: it hurts our currency and increases inflation risk. I don't think your analysis is correct, though. First of all, the Fed hasn't been continuously cutting rates: the first cut was in September, after several years of continuous increases. Since then, they've only cut the Fed Funds target rate (the rate at which banks can lend to each other overnight) from 5.25% in summer 2006 to 4.25% now... a drop of only 1%. Interest rates are nowhere near where they were at the beginning of the housing expansion -- the Fed Funds target rate was at 1% in 2003; it's at 4.25% now. Most people are saying that even in a recession scenario, the Fed will only cut to around 3%. Fed Funds aside, other interest rates remain high. LIBOR (the primary rate at which banks lend to each other) is around 1% above Fed Funds, depending on the maturity. Interest rates on corporate bonds are creeping up as lenders demand to be compensated for increased default risks. Swap spreads have widened. Consumer rates on mortgages and student loans are still relatively high, now that the secondary market for consumer debt has shrunk. Only Treasury yields remain low as investors seek the extra protection they provide. So it's not like the Fed has massively cut rates and money is sloshing through the system. Second, excessively high interest rates can harm individual consumers. At the individual level, it means that you pay a higher rate to get a mortgage, buy a car, pay down your student loan, or whatever. The bigger effect is indirect though: companies can't borrow money to expand their businesses. This means lower employment growth, lower capital expenditures, less R&D, etc. People get laid off, paychecks are cut, consumer spending goes down. By cutting rates, the Fed believes (rightly, in my opinion) that they can at least alleviate these effects, even if it's impossible to prevent them entirely. Lower interest rates aren't even that beneficial to banks. Banks earn money by lending it out. If they are forced to lend money at lower rates, they simply aren't going to earn as much revenue from interest. Wall Street banks also make money through things like trading, merger advisory, debt & equity issuance, etc. -- stuff that isn't really dependent on the absolute level of rates. A Fed Funds cut is hardly a Wall Street bailout.
  - rms 19y ago
    Do you think that the Bush level of deficit is sustainable? If not, what will happen to the US Dollar and the average US citizen? I can understand why it is reasonable to lower interest rates, but it seems to be ignoring the much bigger problem.
    - ctkrohn 19y ago
      The deficit is certainly a problem, and it is not sustainable. However, interest rates don't really have much of an effect on the deficit. Sure, the government has to borrow money at a rate determined by the market -- why would anyone invest in a government bond paying, say, 2% when you could get a AAA corporate paying a much higher rate? But Congress has unfortunately shown a willingness to borrow money regardless of the interest costs. Keep in mind that short-term government interest rates were in double digits for most of the Reagan 80s, when the deficit was massively expanding.
  - ocamlback 19y ago
    Lowering rates won't help the current situation much if at all. The current problem is a crisis of confidence. That confidence can only be restored if the big financial outfits like Citibank come clean about their exposure to MBS and bad debt. As long as they continue to hide their exposure such as by creating this "super SIV" or whatever they're calling it this week, the problems will just fester and confidence will not return - we'll end up with a stagnant economy like Japan had from the early 90's till about 2004.

by ctkrohn 19y ago

whacked_new 19y ago

Thanks for the information!

rms 19y ago

I think it's terrible that the Feds keep cutting interest rates. All it's doing is propping up Wall Street at the expense of individual citizens and the value of the US Dollar -- kind of like how China keeps the Yuan devalued at the expense of ordinary citizens. The last time the Feds cut interest rates this much, it caused a housing bubble.

ctkrohn 19y ago
There are certainly risks to cutting rates: it hurts our currency and increases inflation risk. I don't think your analysis is correct, though. First of all, the Fed hasn't been continuously cutting rates: the first cut was in September, after several years of continuous increases. Since then, they've only cut the Fed Funds target rate (the rate at which banks can lend to each other overnight) from 5.25% in summer 2006 to 4.25% now... a drop of only 1%. Interest rates are nowhere near where they were at the beginning of the housing expansion -- the Fed Funds target rate was at 1% in 2003; it's at 4.25% now. Most people are saying that even in a recession scenario, the Fed will only cut to around 3%. Fed Funds aside, other interest rates remain high. LIBOR (the primary rate at which banks lend to each other) is around 1% above Fed Funds, depending on the maturity. Interest rates on corporate bonds are creeping up as lenders demand to be compensated for increased default risks. Swap spreads have widened. Consumer rates on mortgages and student loans are still relatively high, now that the secondary market for consumer debt has shrunk. Only Treasury yields remain low as investors seek the extra protection they provide. So it's not like the Fed has massively cut rates and money is sloshing through the system. Second, excessively high interest rates can harm individual consumers. At the individual level, it means that you pay a higher rate to get a mortgage, buy a car, pay down your student loan, or whatever. The bigger effect is indirect though: companies can't borrow money to expand their businesses. This means lower employment growth, lower capital expenditures, less R&D, etc. People get laid off, paychecks are cut, consumer spending goes down. By cutting rates, the Fed believes (rightly, in my opinion) that they can at least alleviate these effects, even if it's impossible to prevent them entirely. Lower interest rates aren't even that beneficial to banks. Banks earn money by lending it out. If they are forced to lend money at lower rates, they simply aren't going to earn as much revenue from interest. Wall Street banks also make money through things like trading, merger advisory, debt & equity issuance, etc. -- stuff that isn't really dependent on the absolute level of rates. A Fed Funds cut is hardly a Wall Street bailout.
- rms 19y ago
  Do you think that the Bush level of deficit is sustainable? If not, what will happen to the US Dollar and the average US citizen? I can understand why it is reasonable to lower interest rates, but it seems to be ignoring the much bigger problem.
  - ctkrohn 19y ago
    The deficit is certainly a problem, and it is not sustainable. However, interest rates don't really have much of an effect on the deficit. Sure, the government has to borrow money at a rate determined by the market -- why would anyone invest in a government bond paying, say, 2% when you could get a AAA corporate paying a much higher rate? But Congress has unfortunately shown a willingness to borrow money regardless of the interest costs. Keep in mind that short-term government interest rates were in double digits for most of the Reagan 80s, when the deficit was massively expanding.
- ocamlback 19y ago
  Lowering rates won't help the current situation much if at all. The current problem is a crisis of confidence. That confidence can only be restored if the big financial outfits like Citibank come clean about their exposure to MBS and bad debt. As long as they continue to hide their exposure such as by creating this "super SIV" or whatever they're calling it this week, the problems will just fester and confidence will not return - we'll end up with a stagnant economy like Japan had from the early 90's till about 2004.