Wednesday, October 8, 2008

Fed Cuts Rates

Econ 502:
If the Fed starts buying treasury bonds to put even more downward pressure on interest rates, we might work our way through this. Also, less cash will be in the fed's hands and more will be in the hands of investors. I'm still expecting a recession, but at least its severity can be kept in check.
The banks still have to work their way through some crappy mortgages on their books and the appetite for risk is probably not there in the near term. With lower interest rates, at least more sound projects and investments (or even home mortgages that make sense) will get bank funding.

By Keith Weir and Daniel Trotta
LONDON/NEW YORK (Reuters) - Central banks around the world cut interest rates in unison on Wednesday in a joint response to the global financial crisis, giving a boost to battered stock markets.

The Fed said it was cutting its key federal funds rate by 50 basis points to 1.5 percent. China, the European Central Bank (ECB) and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the coordinated response which analysts had been demanding.

U.S. stock index futures leapt on the news and world stock markets trimmed their losses.
Before the rate cut, stock markets across the world had continued their downward spiral amid the worst financial crisis in nearly 80 years and fears of a global recession.

"The fact that we have got them coming across the board suggests that this is the end game," said Peter Dixon, an economist at Commerzbank in London. "Will it help the markets? Questionable in the short term."

The cuts followed days of calls for concerted action by economists and world leaders after repeated attempts by central banks to inject liquidity into world markets failed to halt a crisis of confidence.

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