Fed Cuts Rates to Historic Low [fed funds from 1.0% to 0.25%]

Wall Street Journal ^

[Sub-Driver]

Fed Cuts Rates to Historic Low

By BRIAN BLACKSTONE and MAYA JACKSON RANDALL

WASHINGTON -- U.S. Federal Reserve officials on Tuesday slashed official interest rates to an historic low range to combat a deepening recession and signaled they will keep rates "exceptionally low" for some time amid rapidly waning price pressures.

Officials also signaled a new phase for policy in which lending programs financed by the Fed's ballooning balance sheet, a process known as quantitative easing, replace the federal funds rate as the Fed's primary policy tool.

The Federal Open Market Committee voted unanimously to reduce the target fed funds rate for interbank lending from 1% to a range of zero to 0.25%, the lowest since the Fed started publishing the funds target in 1990. The market-determined effective fed funds rate already has already hit record lows in recent weeks. (Read the Fed's statement.)

Economists had expected a smaller cut of just 0.5 percentage point, and hadn't envisioned the Fed setting a range.

[SunkenCiv]

FOREX-US dollar tumbles vs euro, yen as Fed cuts rates
reuters | Vivianne Rodrigues
Posted on 12/16/2008 12:18:37 PM PST by buzzer
http://www.freerepublic.com/focus/f-news/2149754/posts

[Ezekiel]

Its like someone with gangrene who's been given a painkiller, and who then postpones cutting off his leg because "it isn't so bad." Then it invades the rest of the body and he's pushing up daisies.

Bump.

[VlPu]

Cooking television series drastically increased - why?
http://engforum.pravda.ru/showthread.php?t=234872

[Ancesthntr]

See PM.

[NVDave]

Understand what I’m about to say is in “normal” times. These aren’t “normal” times, as we’re seeing conditions we haven’t seen in a long, long time, and the last time we saw a debt deflation (the 1930’s) we didn’t have international couplings, hedge funds, CDS, etc, etc...

Mortgages/loans/etc - it depends on the interest rate. If you can borrow money at a low interest rate (”low” relative to the rate of inflation both at the time you borrow it, then it is better to keep the debt (or incur debt rather than spend cash) because you’re paying the loan off in dollars that are worth less than the dollars you borrowed. The only real cost to you is determined by the interest rate relative to the rate of inflation.

An example of this would be people who bought homes in the late 60’s or early 70’s, on a fixed rate mortgage. If they stayed in the home and payed the minimum mortgage payment through the late 70’s and early 80’s, when the rate of inflation was high, they were getting a net:net sweeeeet deal on their mortgage.

If, however, you took out a mortgage in the late 70s/early 80s when inflation was high, and Volcker had jacked up rates to high levels to crush inflation, and mortgage rates were very, very high relative to future expectations of inflation... you got screwed by the high interest rate, and likely would have wanted to re-fi out from under those high borrowing rates.

In an inflationary environment, cash in your pocket (or under your mattress) becomes worth less over time - ie, cash held at a zero interest rate yield is going down in valuejust by sitting in cash in an inflationary environment.

In a deflationary environment, “cash is king” because the value of other asset classes is going down. If you have a loan outstanding as you go into a deflation, you’re effectively paying off a loan with dollars that buy more than they would have when the loan was made. Therefore it is in your interest (generally, ignoring other issues) to avoid paying down a loan in a deflationary environment for as long as you can, or at least until the deflation stops.

Now, if deflations ran for as long as inflations have in this country, (we’ve never had a deflation run for 20+ years - we’ve had brief periods like after 1873 to about 1878, and then the Great Depression) we’d have to discuss how to compute the NPV of interest paid in the future in future deflated dollars - ie, if there was a “rate of deflation” that we could assume going forward for a decade of -2% (the inverse of the nominal rate of inflation +2%), then those future dollars would become worth more (in terms of their power to buy tangible goods in the future) and it would behoove us to pay off that note with dollars today, rather than use the future’s more valuable dollars.

But there is another factor in deflations: they don’t last forever. At some point, people come out of the funk and they start buying again; by keeping as much cash on hand as possible in a deflationary environment, you gain the option of buying tangible/durable goods or property at the lowest (relative to future prices) possible price.

As to which types of investments go with what type of cycle: In an inflation, it is often better to own tangible assets - real property, commodities, metals, etc as a hedge against inflation. Gold is one example.

In a deflation, about the only type of property that really makes sense to deliberately buy is a property that produces a cash flow - ie, a business property - and the business should be producing something tangible and necessary; eg, a farm, or a funeral home, etc. That idea works well in theory, but not always in reality; eg, look at farmland values in the Depression - they crashed, because ag commodities crashed, because of trade wars/restrictions. In general, “cash is king” in deflations - and this is what makes deflations so deadly to a fiat-money economy.

At some point, the general public learns that their mattress is a viable storage option for cash, and they stop spending. They realize that a) prices are going down, not up, b) that cash money is getting harder to come by (by virtue of labor market contractions, wage deflation, etc), and they stop spending. Banks stop lending, or they start making it difficult to borrow, in part because people refuse to buy stock in the bank, or buy bonds or put their money into a bank when the bank is paying jack-all on the deposits. If a bank is going to pay nearly 0% interest, what was the advantage of putting it into a bank over putting it into your mattress again?

So during a deflation, you see crazy ideas put forth by central bankers: they chop rates to rock-bottom lows (see our Fed today), or they start doing things like making off-shore banking illegal (to prevent you from putting your money into a bank in another country where their banks are paying a higher rate of interest), etc.

In the current day and age, you see Fed officials start spouting truly bizarre ideas, like putting RFID strips into cash to impose a “use by” date on your cash in your pocket. The theory is that by putting a RFID strip into the cash, you can enforce an expiration date on the cash and FORCE the person holding the cash to do SOMETHING with the cash by the drop-dead date, thereby “forcing them to engage in economic activity.”

[catbertz]

Wow! You have been very nice to offer this primer. It gives me many ideas to chew on, and you are skilled at explaining concepts. I really appreciate it! I wish you and yours a Merry Christmas :)

[bricklayer]

I gather by your name that you are a genealogist?...an enjoyable, as well as rewarding, hobby/calling.

[Chickensoup]

I have been at 4.75 for five years. My addition is at 2.9 on a credit card for the life of the balance.

I would like the fed to pay off my loans.

[DB]

Wow, what easy money didn’t already destroy will be fixed with more easy money...

Isn’t that how socialism works? It always takes more of the same to “fix” the damage caused by what was previously applied...

[DB]

Probably not much.

In order for a bank to over lower rates they have to believe they will get their money back and then some.

With the coming inflation/devaluing of the dollar that isn’t going to be the case. Getting paid back with dollars that are worth considerably less is a losing deal for the banks.

[ishmac]

BUMP

[sanchmo]

Behold the face of the singularity:

[grey_whiskers]

Give it to me.

As Obama says, "Share the wealth."

/sarc>

Cheers!

[ReformedBeckite]

My prediction is that the banks who make loans for housing and real estates will offer lower interest rates, that is almost a given which is good if your looking to get into a house. But they won't be making as much money per loan so to compensate they will probably make longer loans, all of the sudden 15 year loans will become 20 year loans and 20 year loans will become 30 year loans and I predict that the banks will offer 50 year loans to individuals if they can. In turn real estate might start selling again, but as soon as the real estate starts selling again the prices will go back up to inflated prices and the same old games will be played out that got us into the situation we are in today. Look for loans to be offered at really low rates for the first 5 years and then refinanced after that with the banks hoping the interest rates go up. Another banking trick that got us into the trouble we are in now. But the good thing about the mess that they got themselves in is that they won't be giving out loans to ever Tom, Dick, and, Sue unless you are credit worthy, but probably the government will.

Does anybody agree with me on this.

[BamaBlue]

Go here: http://valleymls.com/(h2aoje2fq3d5pa2ncpizcxq4)/Default.aspx

Click on “Financing” then click on “see local rates”.

I’m blown away by these numbers...RBC Bank conventional 15 & 30 year fixed at 4.375% with 0 points...

This is in Huntsville, AL and don’t know if it translates to other parts of the country...

Good luck...

[BamaBlue]

Forgot to mention...

Thank you for your service...

[HereInTheHeartland]

“I’m seeing 5.75 to 6 right now near Chicago for 30 year fixed. Where do I go for these 4% rates?”

We hit 4.625% today. Most lenders should be close to that in your area..

[Freedom_Is_Not_Free]

You made my point much better than I could have done. Sorry for your hardship and I hope your husband lands on his feet.

[Freedom_Is_Not_Free]

Compromise. Silver bullets. You’ll need them for those Vampires anyway.

[Freedom_Is_Not_Free]

In a hyperinflation, debt is the place to be. Any debt. Car loan, evaporated. Mortgage, vaporized. Business loans, dematerialized. Debt is what you want to hold in a hyperinflation. Debt you held to secure real assets.