A 1% Rate Isn't What It Used To Be

Why the Federal Reserve’s cut to 1% rate will fall short, according to a Financial Times of London editorial: 

“The power of traditional monetary policy may nevertheless be limited in the present situation …. Jammed credit markets mean that any cuts will take more time than usual to filter through to the economy … with banks reluctant to supply new credit in the first place, overall benefits are capped … to boost the real economy directly, the central bank needs to be supported by fiscal policy.”

Danielle Park in her Juggling Dynamite blog, says the cut to 1% won’t have the same stimulus as the 1% cut in 2003:

“The world economies are in a lot worse shape now compared with 2003. Back then we just had a stock market bubble and the after shocks of 9/11 to deal with … I doubt that this 1% will have the same simulative effect as the last 1% did in 2003 …. The cut to 1% in 2003 did not work right away even then. They left rates at 1% for one full year before consumption picked up meaningfully in 2004 …. Secondly, consumers also had a lot less debt in 2003 than they do today.”

More on the liquidity trap by Robert Brusca, chief economist at FAO Economics:

“Banks are like roach motels. The rate cuts go in but they don’t come out,”

So we could see more of this.

Comments

[investor88:]

A rate cut is not what it used to be like 2003. Useful to note that the 1% stayed for a year before it had any effect in 2003.

This time the challenge is whether the cut to 1% or even zero ala Japan is going to work. Right now we are having a equity rally. When this rally is over in a few days/weeks/months, gloom may well return.

2008 Oct 30 09:54 AM

[Dr. Jackpot:]

Rate cuts are meant to steal savings from older retired. It's the only scource of real cash left. You saved 30 years? You're screwd.

2008 Oct 30 11:43 AM

[kurt walter:]

Isn't Greenspan's 1% rate for too long what helped cause the mortgage and credit problem? So we are going back to it? It is like a convicted drunk driver going back to drinking and driving. Have the Feds learned nothing? Understand trying prop up real estate prices will not work. It will only delay the inevitable. Residential real estate is way overpriced. Usually it takes a few decades before the Feds make the same old mistakes of the past. Now it takes a few years.

2008 Oct 30 12:22 PM

[OctoberFaith:]

you can't even step back to analyze your own question. don't you think that there might be a problem there?

I dont think people who aren't willing to pay up on their loans should get credit, why have % rates inside country low just to give it to people who will throw the money out?

you dont have to loan to EVERY SINGLE PERSON. just because an option is there doesn't mean you have to take it. select your options, take a step back, remove the fear so you evaluate where the real value is going to be.

2008 Nov 03 10:36 AM