Low Rates Will Encourage Borrowing, Not Saving

The Federal Reserve made a bold move and lowered rates effectively to zero. Here’s the full statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

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.

It took a few years but finally they’ve moved in front of the bond market. As I’ve been saying for more than a year, the Fed allowed the bond market to get way ahead of it and then started to play a game of catch up where they would lower only to see the 90 day Treasury bill rate slip lower still.

To put it bluntly, the Fed is punishing saving and rewarding spending and debt

. With inflation running at ~1% anyone who saves money is a chump. Many money market funds now have a negative return (due to MERs).

Anyone who goes in debt to the gills wins. Isn’t that how we got into this mess? you might ask. Well, who said common sense had anything to do with monetary policy.

Believe it or not, the US now has a lower interest rate than Japan. And the lowest rate since records have been kept.

After Japan, the lowest rate is claimed by Switzerland after the Swiss national bank cut their benchmark rate to 0.5% last week. Then Canada at 1.5%. Follow the link to see more global central bank rates.

Comments

[cash:]

There will be hell to pay later (or sooner)

2008 Dec 17 12:39 PM

[CurveTrader:]

Reflation does not work in a country where consumers and businesses are deleveraging. They're unable (or unwilling) to get further into debt. Instead, consumers are frightened to loose their jobs, increase savings and pay back debt, resulting in deflation. Only after a necessary period of falling prices and other stimulus actions (e.g. tax cuts) will the Fed's policy work. So for now, don't worry about the dollar.

2008 Dec 17 12:46 PM

[Chris B:]

Who is putting money into treasuries at near 0%? Don't they recognize the potential for loss when rates go back up, as they inevitably will?

Heck, I'm earning 3% in my FDIC insured EmigrantDirect.com account. Maybe I'll be named Wall Street money manager of the year for that stroke of genius.

2008 Dec 17 01:23 PM