With 75bp Cut, Fed Becomes the Most Aggressive Central Bank 30 comments
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The Federal Reserve cut interest rates by 75bp to a range of 0 to 0.25 percent, the lowest level that this generation has ever seen.
In our FOMC preview, we talked about how the Fed may consider adopting a BoJ style rate cut that takes interest rates somewhere between 0.25 and 0 percent. Although that was exactly what we saw Tuesday, we expected it to happen in March and not December. The Fed has taken another page out of the Bank of Japan’s book and will continue to follow in the footsteps of the Japanese central bank as they formally adopt Quantitative Easing even though they refuse to use those words explicitly.
It is no surprise to see the US dollar selling off aggressively as it is now the lowest yielding G10 currency. This was the right move for a central bank that wants to be proactive and no longer just reactive. There is no point for the Federal Reserve to play games anymore by denying what is already being priced into the markets. Cutting interest rates to 0.25 percent was inevitable and they would rather deliver this stimulus now than later. Fed funds were trading as low as 0.15 percent going into the FOMC meeting. The Federal Reserve expects to keep interest rates at “exceptionally low levels for some time,” and to employ all available tools going forward including the purchase of long term Treasuries. In other words, the Federal Reserve is telling us that they are formally moving to Plan B, which is Quantitative Easing.
There is no question now that the Federal Reserve is the most aggressive central bank. Since 2007, they have cut interest rates by 500bp and since the beginning of the year, they have cut by 325bp. With the economic outlook weakening and the financial markets remaining quite restrained, the Fed wanted to over rather than under deliver. Tuesday morning’s consumer price numbers also raises the risk of deflation, which may have pushed the Federal Reserve to make the larger move. The Fed did not indicate in the FOMC statement whether zero interest rates are still on the table, but an interest rate of 0.25 percent is just as bad.
The US dollar has embarked on a new downtrend and Tuesday’s interest rate decision only cements that. We expect more dollar weakness in the first half of 2009. There is a reasonable chance that USD/JPY could fall to 85 and the EUR/USD could break 1.43. And of course, I still love the AUD/USD trade.
Comparing the FOMC Statements:
FOMC Statement December 16, 2008
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
FOMC Statement October 29, 2008
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.
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This article has 30 comments:
I do wonder how many people will be suckered into buying expensive homes due to cheap credit - and then once interest rates begin to rise due to inflation - how many of those same people will eventually feel pain when they lose homes AGAIN with massive interest rate increases? Oh well, not my problem.
The Fed will never learn - increasing debt doesn't fix the fundamentals of an economy. Otherwise, we could just spend our way to prosperity with debt dollars. That isn't fundamentally sustainable or possible over the long run.
On Dec 16 04:47 PM Robert Nabloid wrote:
> Dollar carry trade anyone? Sounds familiar! I think there was another
> country that did something similar to fix things but it didn't work
> out as planned - except that country still had a big consumer market
> to export products to in order to capitalize on its cheap currency
> for competitive reasons.
>
> I do wonder how many people will be suckered into buying expensive
> homes due to cheap credit - and then once interest rates begin to
> rise due to inflation - how many of those same people will eventually
> feel pain when they lose homes AGAIN with massive interest rate increases?
> Oh well, not my problem.
>
> The Fed will never learn - increasing debt doesn't fix the fundamentals
> of an economy. Otherwise, we could just spend our way to prosperity
> with debt dollars. That isn't fundamentally sustainable or possible
> over the long run.
1. Inflation, based on injections, will move in serial to each other. In other words, inflation will not rear its head until we are finished with this crisis, when, in fact, they can occur concurrently.
2. The Fed has the necessary tools, timing and political will to mop up the injections before inflation hits.
3. The long-term consequences are better than the short-term consequences of their actions.
4. There is not a structural problem with our economy (fundamentals as Robert stated above).
5. Consumption levels of the past 15-20 years can somehow be sustained for the next 15-20 (absent a bubble).
6. The dollar and the Fed are not at risk of a collapse if the interventions fail.
For a long time one of my primary concerns has been the lack of transparency with the complete bailout process. Bloomberg can't seem to get the recipients of $2 trillion out of the Fed, GE stated today that it will stop issuing guidance on a quarterly basis, etc., etc.
It is my opinion that the problems must be extremely serious and that our economy is at risk of collapse given the tightening of valid, honest information. Soon (if not already) the markets will be a shill for the Fed and the dollar will go the way of the penny (costs more to produce than the face value).
As for Japan... At least they are not in debt up to their ears. The Fed and Treasury are betting our future away... SWRichmond: I wouldn't count on your plans, just yet.
you see, economy its such a beautiful science, the study of human behaviour on how it deals with money.
thats what it is.
they(us govt) are repeating something that has already failed,
what they expect ?
a quick momentum, and booom, 5 to 10 years of recession.
thats what will happen.
the next bubble, the treasury notes, will burst, people will sell, US will issue more and by doing this their debit goes higher and higher, why dont they just rent the country to arabs and all the rest already ?
its better, debit-free, and you even make money out of it.
so much better investment.
As for the economy, what is the fed thinking? Dropping interest rates has already decimated the income of people with cash and as we all know dropping rates towards zero encourages $ hoarding the worst way possible. Withdrawing it out of banks and keeping it at home. After all, what's the difference if you start to get 0% interest on your money.
Once again, like the fed dumping tons of treasury notes on the market to finance their expansion of their balance sheet, they are doing things that suck up the dollars causing a shortage that encourages deflation and like paying interest on deposits at the fed, encouraging banks not to lend and hurting banks by insuring everyone else. What's the difference between a money market or a mortgage bond insured by the fed etc. They are all backed by the government. So if you get higher interest on a risky bond backed by the fed why invest in the bank. No wonder the banks can't get money. Can't raise $. And can't afford to lend $. You might as well close them all and say the fed has taken over the entire money lending system (ie the monetary system as we know it).
And the fed wonders why jobs and the economy are dropping and these investors are not willing to lend anymore. Where is the incentives. Higher risk and lower rewards are not particularly enticing.
but if they do, I wonder, what happens to america ?
does it become a russian-alike country ?
a lot of nukes, no economic power ?
well, they still got the corporations out there, to make and send money back home.
> sooner or later ill wakeup and read the highlights; "china dumps
> all US bonds" hahaha, damn. I hope not.
> but if they do, I wonder, what happens to america ?
SWRichmond sells his TBT, that's what happens.
curbs-in,
There's a simpler explanation. The Fed doesn't necessarily believe all those things. They are doing what they are doing because they have no choice, to do nothing would be to admit that central banks are a sham, and that would be the same thing as trying and failing. So they will try, because they must, and, I believe, they will fail. I hope they don't, but I believe they will.
And, if there's still a financial system, as a critical mass of investors are in the process of recognizing the Fed's failure, I will be selling my TBT.
But, a strong euro and a weak dollar means what? Along with lower demand and OPEC problems maintaining quotas, lower fuel prices for the EU? More (targeted) price deflation? Even lower exports? They may have to ease substantially, too. I believe this is what Bernanke means by coordinated action. We'll see.
Curbs-in, yes, you're right. Inflation will hit once the credit crisis is solved. I just don't see how dropping another 75bp will help move the credit markets anytime soon when easing over 300bp hasn't helped...yet.
I also believe the Fed will be all over inflation when it begins to appear...using every tool in their arsenal. They'd better. If short term pain will help longer term gain, I'll bite from the sandwich. We all are.
The "structural problem" with our financial economy is the scams on wall street: Madoff scandal and banks doing insurance functions...holding risk on MBS while selling off the asset and engaging in CDSs. The SEC needs a house cleaning. Outside of that, Mccain might have been close to right. Mom and pop want to engage in small business...and hire illegals.
And you are right, curbs, we are in deep trouble. Maybe in depression level trouble, at least in my understanding of the crisis. But, on the upshot, we should have tighter regulations on Wall Street in the end. (Anyone trust Wall Street to regulate itself for the greater good? Not me.) In the end, the Fed will have to regain control over the money supply (thanks, again, Wall Street for that one)...as it winds down despite injections. They will tighten as inflation hits.
However, I believe we will settle into a slower, more sustainable rate of growth and hopefully away from bubble to bubble economy. Sorry, China, you're gonna have to adapt to reduced exports right in the middle of your plans to build a self sustainable middle class...and settle for single digit growth, too.
We might need to rethink our entire banking system. There are already calls for the government to eliminate or federalize the Fed. After the debt based fiat dollar (and other currencies) bites the dust, maybe we'll peg it to something of value. I am not sure the oligarchy will go for this, though. What? Rob them of wealth?
<sigh>
Economics is the study of the allocation of resources -- money is only a tool to that end. Speaking of allocation... So many things missing in these plans...
1. Agriculture -- It's currently facing Great Depression style problems. Have you heard of a plan to bailout or help Agriculture? We may be facing severe food shortages in the next few months, but not a word from our government. I guess we'll have cheap home loans and nothing to eat.
2. Logistics -- the movement of goods. This is in sorry shape and on the edge... The Baltic Dry index is almost 3,000 points down from where shippers can make even a small profit, and the trucking/railroad industries... Remember, the big problem with Katrina was logistics; there was food, water and medical goods all around New Orleans, but there was a total logistics failure.
3. Small Business -- responsible for most job creation in the past 15-20 years, yet they are left to rot on the vine. The firms that are getting the bailout $$$ are not creating jobs, in fact they are cutting jobs by the tens of thousands.
The cuts by the Fed signal desperation... Then the Fed says that they'll do anything to deal with this crisis; apparently that means not worrying about the future consequences of their actions, but what the heck, not worrying about the future is how the Big Three got in their positions, isn't it.
I heard the Fed's action today described as Economic Shock and Awe. Perhaps, if it works out like the Mae-Mac Bazooka, they should call it Economic Awe Shucks.
I agree with you. But they have powerful tools that they could use to help both short-long term...
Tax Policy -- Why not help out small business and give them huge tax cuts? It would help put people to work and increase the production sector that we really need and all of this could be structured in the tax code. Why reward borrowing through our tax laws, when we need to save?
Repeal of the self-employment tax for a five or ten year period -- This would encourge those who are displaced to strike out on their own...
Massive Injections through the Small Business Administration -- Why give $billions to Bank of America only to have them do what they did in Illinois, then lay-off thousands of workers? Use the SBA to directly infuse the money to small business that do most of the job creation in our economy.
Helping small business and the self-employed will make are economy both stronger and get away from risky too big to fail companies that will take our country with them when they fall.
Just some of the actions I would take...
It seems to me (in my limited view of the world), that the American people are FINALLY starting to do what they should have been doing for the past 30 years - living within our means and not borrowing to support a lifestyle we cannot afford. So, the reaction of the Fed and the government, is to take over and centralize the stupidity of our generation.
It has taken the American people 30 years tot realize that it is stupid to pi$$ away money they do not have. So, now the government and the Fed have stepped up to the plate to be the stupid ones for the whole country!
Inflation is en route.
On Dec 16 04:47 PM Robert Nabloid wrote:
> Dollar carry trade anyone? Sounds familiar! I think there was another
> country that did something similar to fix things but it didn't work
> out as planned - except that country still had a big consumer market
> to export products to in order to capitalize on its cheap currency
> for competitive reasons.
>
> I do wonder how many people will be suckered into buying expensive
> homes due to cheap credit - and then once interest rates begin to
> rise due to inflation - how many of those same people will eventually
> feel pain when they lose homes AGAIN with massive interest rate increases?
> Oh well, not my problem.
>
> The Fed will never learn - increasing debt doesn't fix the fundamentals
> of an economy. Otherwise, we could just spend our way to prosperity
> with debt dollars. That isn't fundamentally sustainable or possible
> over the long run.
What about those that didn't get suckered into the sub-prime mess and now get suckered into ultra low interest rates? Do you not have to re-mortgage every five years and then possibly get hit with higher interest rates when you go to re-mortgage?
On Dec 16 11:32 PM sickofthehype wrote:
> If the people you refer to have lost one home already, then they
> won't be taking advantage of any cheap credit. And if someone IS
> taking advantage of the cheap credit, they won't have to worry about
> future rate hikes as this new cheap credit is 99% fixed rates.
>
> Inflation is en route.
Access to easy credit was encouraged and the biggest contributor to that was Greenspan. I am in favor of abolishing the Fed as they always seem to make a bad situation worse.
As a solution to the current problem I propose a one year exemption on personal income taxes. This will immediately put money back into the pockets of homeowner's in the middle class. This would help a major part of the middle class which accounts for 70% of the economy. I can't think of any better way to encourage saving, continue to promote investing, and leave people with enough money to also discretionally spend. I can see home prices appreciating a quicker rate if this was implemented. Not a single dime should've gone to Wall Street.
even if one assumes success, anyone who thinks that the fed will thereafter quickly "mop up" all the excess liquidity it has created is at best naieve and at worst ignorant. there has been just one fed chairman in history who has had the courage to sacrifice economic growth to control inflation and that is paul volker. but that was then and this is now....when a severe recession apparently threaten to bankrupt our debt-laden country thanks to a dysfunctional u.s. government and federal reserve. in any case, ben bernake couldn't carry volker's luggage.
it is aparent that the fed is running scared. look for lots of pain over the next couple of years. best trade is long FX, short USD.
On Dec 16 09:21 PM jepittman wrote:
> The Fed is forcing money into risk assets and thus unfreezing the
> credit markets. I fail to see how this is a bad thing when the alternative
> is an economy crushing deflation. At some point the money creation
> will be inflationary but it may be many quarters later. This necessary
> action will allow undercapitalized banks to lend more profitably
> and over time repair their balance sheets. It will allow stressed
> homeowners to refinance mortgages and save their homes. It will allow
> first time home buyers an opportunity to own their own home. It will
> reduce borrowing costs for millions of small businesses struggling
> to stay in business and keep their employees. It reduces interest
> expenses of thousands of municipal governments delivering basic services
> to millions of people. The list could go on for many pages. We should
> all be thankful this Federal reserve is NOT repeating the mistakes
> of the 1930 Federal Reserve which was to INCREASE rates in the face
> of a growing deflation, contracting credit, and falling confidence.
> The result was what we have come to know as The Great Depression
> and was caused by POLICY MISTAKES primarily made by that Federal
> Reserve. Thankfully THIS Federal Reserve will allow no such conditions
> to long exist. This Fed WILL refalte this economy and with it the
> global economy. The stock and bond markets will recover. Beware of
> fighting a determined Federal Reserve. IMO there has never been a
> more determined Fed than this one.
Not that there is anything intrinsically wrong with that, but on the other hand be aware that she has never posted an argument that USD would rise, even in the last 3 months when it rose 20% against some currencies.
In other words: Bias alert !!
escapethedepression.co...
Definitely might turn out to be a worthwhile site for the guy owning it! hahaha
On Dec 16 03:34 PM SWRichmond wrote:
> Kiss Bucky Goodbye!
The Fed has bottomed out on useless rate cuts, thankfully. Now, QE is in vogue. We'll see how this works out. Some draw parallels between Japan and the US. There are some differences, but many I think make QE worse for the US. At least Japan ran trade surpluses. Still reading up on all that. More later.
Maybe if the Fed works this right, Bernie can leave the oligarchy holding the bag of worthless MBSs...ya think?
I am thinking about all those grim black and white depression photos of soup lines and contemplating hijacking a boat and taking up piracy on the high seas...if I could only afford the peg leg, eye patch and parrot.
Let the financials fail, as the old mute argument goes. This way, the banks that survive can pay us interest for the privilege of holding our money, not us paying them interest for the right to use theirs. This is the reason I struggled to get out of debt years ago...to get some interest flowing into my pocket, not higher interest flowing out of it.
I am gonna miss deflation...
nothing but thumbs up to you man. you defently way more expirienced than me , so, i have something to learn here.
anyway,
when i make jokes about "renting the country to arabs" i dont want people to think i am being anti-american (even though, i am not american) but its just a realistic situation that i sadly, currently see, and i believe many of you share the same opinion as I do.
about, 80% of my reserves are in US Dollars, because i trully believed america, the exchange rate skyrockted with the crisis, and multinationals, taking money from their factories overseas to send to the mother ones in US. so, that was very good to me, now, with the fed cut, I not only see a recession, a depression coming to america, as a huge devaluation, thats is terrible. comodoties will skyrocket. (watch in PBR, petrobras)
i guess its time to believe in my own country again.
we went from 1.00 USD/1.50 BRL(brazilian real) to 1.00 USD/2.40 in less than three months, it will be unsustainable, as some have stated here, - "who will keep money on US banks paying 0%?" brazil pays 13,25% , turkey pays 17% (well, i rather believe brazil is safer than turkey) where the capital will flow, no doubt, it will come back here.
and, believe me, thats what will "save america"
at the same time, i think this cut was very bad and self destructive, it wasnt "all dumb"
the thing is, tons of investors, selling off dollars, coming to emerging countries with resoable internal market (like here, and india, even china has a nice internal market) they sell their products in local currency and return the dollars back to their mother land.
im out of the market, honestly, if the devaluations brl/usd hit the fan, ill start importing tons of good from china, and start selling them here.
i got some other "survival theories" for hard times, but i guess, i leave to another topics. =]
last but not least: lets not forget, we are all integrated, in a way we never been before, if you shake it here, its an earthquake there. and so on..
the idea of total independence, to every market, nowadays, is total stupidity.
This does smack of desperation.