Fed Rate Cut: What Happens When We Get to Zero?

Boy, they sure whine a lot on CNBC - you'd think short-term interest rates were like 10 or 12 percent the way they were crying when they didn't get the full one-point cut. Next time, the Fed should just cut by 2.25 points and go directly to zero and just get it over with.

That's the real question for equity markets - what happens when we get to zero?

Here are the last two policy statements from Ben and the boys - it was near impossible to find the one from January since they've been doing press releases just about every day now. When they start doing press releases twice a day, then you'll know we're really in trouble.

[click to enlarge]

It was almost a complete re-write from last time and there were two dissenting votes in Richard Fisher and Charles Plosser who preferred to at least put up some sort of facade about "fighting inflation" and/or not throwing the nation's currency "under the bus".

Haven't they been expecting "inflation to moderate in the coming quarters" for about the last two years now?

Comments

[mark mchugh:]

Tim,
Great article. Couldn't agree more. It's like watching a bad magician. Everyone knows how the trick is done, yet there he is, trying to amaze us. Let's just go to zero and take it from there.

2008 Mar 19 08:01 AM

[bamx2:]

Is this more "smoke and mirrors" . Election year politically driven short term fixes make things much worse in the down the road

2008 Mar 19 08:08 AM

[Birdie:]

I think politics plays a large part of it and pray that we have a "savior" who has the guts to get the money guys to vote with a conscience.

2008 Mar 19 08:50 AM

[vaduz:]

how true this is. one knows from past espierience that high money supply hits the economy and the prices after 6 to 12 months.

2008 Mar 19 09:50 AM

[Joseph McSp...:]

I don't know if you've read the headlines, but we don't have a savior lined up. As bad as our politics are today, they will either maintain status quo or get worse in the 2008 election. If the dems win, we will be paying for everyone's healthcare through increased taxes and other means (bad for the economy) and if the reps win, we will be still in a very expensive war in Iraq (still bad for the economy). Nothing will change, regardless of who is elected President. I will go further to say the "savior" will probably be the President in 2012, because we will more than likely be in an upswing in the cycle. The President will have to do little more than show up to be declared an economic victor.

2008 Mar 19 12:29 PM

[gordon:]

Bernancke declared flat-out his decisions AREN'T POLITICAL, won't be influenced by politics...remember? We let over 100 banks fail in the early 1990s, the RTC auctioned off what was left.The difference now is Paulson, in the greatest conflict of interest in US history, controls the purse-strings to the largest hedgefund in the world and his former company. Are you going to tell me he didn't signal to Goldman what the rate cut was and they didn't tell him of their expected earnings beat? Are you going to tell me that Goldman didn't defend $SPX 1275 on Monday, exactly to the dollar, setting the market up for Goldman's earnings the next morning? You going to tell me Goldman, making $500 million on the Visa IPO, didn't tell them to move up the IPO today, having set GS earnings, double-bottom in $SPX, .75% rate cut, NO ECONOMIC RELEASES (only oil inventories) and ahead of options expiration? It's all rigged for the Big Boyz, folks.

2008 Mar 19 01:11 PM

[nitroae23:]

2.25% Fed Funds rate,2.5%-3% inflation,aren't we already at zero?

2008 Mar 19 03:16 PM

[User 154852:]

I can't believe Paulson is considered 'the $ guy' in our government!!! How he ever got to Goldman as 'the kingpin' is beyond me. If you saw him last Sunday on Meet The Press (et al), you'd be as mortified as I am!!! A totally clueless and horrible representative of our government financial network!

Send him back home to Barrington Hills, IL so he can ride his horses....maybe he'll bang his head and remember how he got through Harvard Business School.

And Gordon's comments are right on.....Paulson's a disgrace!

2008 Mar 19 06:25 PM

[J in N Idaho:]

I find it comical that Bernancke and Bush meet up this week. I am sure Bernancke tells Bush the real truth, especially about inflation. Bush finally hears that people are going to stop spending money on fuel, and start walking. Immediately, we see commodities sink. Oil takes a huge dive. Gold and Silver do the same. They finally found the top end of what people were willing to pay for fuel. Funny how the price decline in oil still hasn't translated to lower pump prices. However, whe oil goes up, pump prices mirror it right away.

I believe Gold will rebound. To drop 70 to 80 dollars either means one of two things: everyone had an automatic sale in place which created a domino affect. However, everytime gold's price moves $0.90-1.00, it means about 1 Billion of actual gold sales took place. This drop in gold price means about $650B of Gold just got sold. I wouldn't be surprised to learn that Dick Cheney and Company just sold their gold stash and that Bush and Company just sold their Oil Stash.

We all know that the drop on interest rates isn't helping the consumer get lower priced mortgage rates. Banks are keeping the spread. We need a new target rate for those using a SS#. Somehow the individual needs to get the benefit. If we had a different rate for those using a business Tax ID#, then there might be a way to get our individuals excited about purchasing homes again. As it now stands, home prices have been lowered to the point where the owner has no equity when they sell. The rates, and down payment requirements have the buyer at his maximum. The gulf inbetween can only be alleviated by lowering the rate, offering, or having the bank accept a short sale. What's it going to be? Short sales aren't getting much press. Rate drops aren't getting to the buyer. Bernancke's trying. Banks are being greedy. Pass over the interest rate you greedy banks. Let that ball out of the corner. Once we see movement, raise the rates.....but, much slower this time. When 2005 peaked, and rates started to climb, that's when all broke down. Give people time to adjust. 1 Point a year max on the upside.

2008 Mar 20 05:04 AM

[Tony Soprano:]

Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

Recession, May 1907-June 1908, 13 mo

Recession Jan. 1910-Jan. 1912, 24 months

Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

Recession Jan. 1913-Dec. 1914 23 months

World War I -- 116,708 killed – 33 billion

Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

Recession Aug. 1918-March 1919 7 months

Recession Jan. 1920-July 1921, 18 months

Recession May 1923-July 1924 14 months

Recession Oct. 1926-Nov. 1927 13 months

The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The "dust bowl" covered 50 million acres in the south-central plains during the winter of 1935-1936.

Labor Day Hurricane of 1935, 400 killed

Recession May 1937-June 1938 13 months

World War II – 408,306 killed – 360 billion

Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

Recession Feb. 1945-Oct. 1945 8 months

The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

Recession Nov. 1948-Oct. 1949 11 months

Korean War, July 1951 - July 1953 – 33,000 killed in action

Recession July 1953-May 1954 10 months

Recession Aug. 1957-April 1958 8 months

Recession April 1960-Feb. 1961 10 months

The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

The Cuban Missile Crisis, Oct. 1962

Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

Vietnam War, 1963 – 47,378 killed in action

The murder of JFK, 1963 Nov

The Gulf of Tonkin Incident, Aug 1964

The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

The city riots of April, 1968 – 30 cities affected

Hurricane Camille, Aug 1969, 259 killed

Recession Dec. 1969-Nov. 1970 11 months

Stagflation of the 1970s began

Nixon first imposed wage and price controls on August 15, 1971

Oil Embargo, Oct 1973 long gas lines

Recession Nov. 1973-March 1975 16 months

Articles of Impeachment of Nixon started
(Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

Deregulation: 1974-1992 this era began when Nixon left office

Three Mile Island nuclear power plant crisis, March 1979

Mount St. Helens eruption 1980

Recession Jan. 1980-July 1980 6 months

Prime reached unbelievable 20% in January 1981,

AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

Recession July 1981-Nov. 1982 16 months

California earthquake 1983

The 87 market crash - Black Monday

California earthquake, 1989

Recession July 1990-March 1991 8 months

Iraq invaded Kuwait on August 2, 1990

The Persian Gulf War, 1991 or Desert Storm Jan 1991

Hurricane Andrew 1992 very destructive United States hurricane

The Great USA Flood of 1993

Intervention in the Former Yugoslavia,

Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

9/11 Attack, 2,974 people died

Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

Enron bankruptcy in late 2001, employed 22,000

WorldCom, July 21, 2002, filed for Chapter 11

Iraq War, March 19, 2003 – 4,000 dead

Hurricane Katrina, late August 2005, 1,836 people lost their lives

Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.

2008 Mar 20 03:09 PM

[plumber2:]

Congress needs to act to provide a real not fiction stimulus:

The problem with the proposed stimulus is that government has no money unless they first take it from us by higher taxes.

What we need is a policy that benefits the public month after month without raising taxes.
A) Cap interest rates on credit cards @ something like 14% versus the excessive usuary rates banks and credit cards charge of 25 to 32%.

B) Limit the spread between the FED rates and mortgage rates banks can charge so that the discount is passed on to prospective homebuyers by the bank.

C) Allow large corporations to write off large business investments in a two year period.

Congress also needs to immediately enact a National Comprehensive Energy Plan.

This plan needs to admit that the countries of the world are in a race to ensure they have an adequate energy supply into the future until they have a workable hydrogen solution. This is a race that if we lose we become a fourth world country over night along with a 10% or higher unemployment rate.

This means we should utilize all available sources of energy that science not politics proves is viable. Such as building more nuclear plants, build at least four more oil refineries located inland where they are not affected by hurricanes,
Use liguid natural gas to power large trucks ( approx 5 % are already powerd by this source), build clean coal technology CTL
(Coal to liquids) plants, develop geothermal energy where feasible,
Allow our oil companies to drill off our coasts and under the rockies,
Require new construction to be powered by solar for 30% of their power usage. Develop more wind farms and more hydroelectric power. Stop the ethanol farce and develop bio-diesel from trash.

Link the development an implimentation of our energy plan to a cut
in our purchase of Arab oil by approximately 3% yearly until we cut our dependence on foreign oil by 50%.

If we fail to act to get energy right all of the other things will be moot.

2008 Mar 22 02:06 PM

[dustbusterz:]

all the ideas Pilot Dan speaks of are sensible plans, however, all this should have been done years ago. to start doing all this now, will take years to accomplish. meaning we will be in a funk for years to come.

2008 Apr 06 08:15 PM

[dustbusterz:]

everything Pilot Dan suggests is reasonable and can help. however, all of these things should have been done many ears ago. to begin setting all this in place now, will take years. this means our country will be in a funk for years to come.

2008 Apr 06 08:18 PM