Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15
Black Monday - Rolling A Wheelbarrow Of Dynamite Into A Crowd Of Fire Jugglers - 24th Aug 15
Playing the Chinese Trump Card - 24th Aug 15
Gold and Silver: Heading for a “Blue Screen of Death” Event? - 24th Aug 15
Japan Economy Clear Conclusions Concerning QE - 24th Aug 15
Stock Market Blockbuster Right From the Open... - 24th Aug 15
Silver And The Petrodollar - 24th Aug 15
Why the Stock Market Sell-Off Happened – and How to Make Money on It - 24th Aug 15
Stocks Correct, Panic Ensues. The End Of The World? - 24th Aug 15
Stock Market - The Sky IS Falling - 24th Aug 15
SP500, DAX, FTSE - When Stock Markets Talk, Pay Attention - 24th Aug 15
Stock Market Black Monday - Full Crash Alert! - 24th Aug 15
Stock Markets Implode as China Literally Explodes - 23rd Aug 15
Stock Market Bloodbath - The Feds Gonna Need A Bigger Balance Sheet - 23rd Aug 15
Stock Market Due For A Breather (But More To Go) - 23rd Aug 15
Stock Market 20% Bear Market in the Works - 23rd Aug 15
Ankara: the New Capital of Jihad, U.S. Policy for Strengthening ISIS - 23rd Aug 15
Will Rising Interest Rates Crash UK House Prices? - Video - 23rd Aug 15
Stock Market Primary IV Underway? - 22nd Aug 15
Gold And Silver – NWO In Its Element: Problem, Reaction, Solution. Beware - 22nd Aug 15
Stock Market Nirvana Has Been Broken - 22nd Aug 15
Three Ways to Profit from the Stock Market Correction - 22nd Aug 15
S&P 2040 Breaks Down... Stock Market Turns Bearish - 22nd Aug 15
Storm Clouds Are Gathering Around Peer-to-Peer Lending Sector - 22nd Aug 15
Crude Oil Price Crash Continues: West Texas Crude Below $40, Brent Near $45 - 22nd Aug 15
Pandemonium in the Stock Market, Dow falls 1,000 points in a week - 22nd Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

U.S. Fed Zero Interest Rate Policy Coming?

Interest-Rates / US Interest Rates Oct 31, 2008 - 07:34 AM GMT

By: Mike_Shedlock

Interest-Rates Best Financial Markets Analysis ArticleThe Fed did not want to cut the Fed Funds Rate below 2%. And because Congress recently granted authority for the Fed to pay interest on reserves, Bernanke thought incorrectly that he could keep rates above 2%. So much for that academic theory. Now many are wondering if ZIRP (Zero Interest Rate Policy) is coming to the Fed.


The LA Times addressed the question today in The Fed's rate at zero? It's no longer a far-fetched idea .
Just a day after the Federal Reserve dropped its key short-term interest rate to 1% -- matching the generational low reached in 2003-04 -- the betting is intensifying on another cut.

Trading in futures contracts on the federal funds rate, the Fed's benchmark, implies a 51.4% probability that the central bank will slash the rate to 0.50% on or before its next meeting on Dec. 16, according to Bloomberg News data.

Rate expectations may be cueing off the government's report today that the economy shrank at an annualized rate of 0.3% in the third quarter. Although analysts figured the economy had contracted in the period, the details were ugly -- particularly the 3.1% decline in real consumer spending, the biggest drop since the vicious recession that began in 1980.

The Bank of Japan had to maintain its benchmark interest rate at or near zero for most of the 1999-2006 period, before policymakers finally felt comfortable that the economy was in a sustainable recovery.

December FOMC Meeting Implied Probability


Chart courtesy of Cleveland Fed .

Rate Cuts Counterproductive

There was an interesting discussion on Minyanville today about rate cuts. Minyan Peter offered the following thoughts.

" With Fed Funds already trading at 1.00% prior to the announcement, it will be critical to watch whether other short term indices drop by 50 bps, particularly LIBOR and, probably most importantly consumer deposit rates.

If short term bank liabilities do not reprice down by at least the 50 bps cut in the prime, contrary to public perception, banks will now be worse off than they were before yesterday's announcement. … If yesterday's rate cut in any way squeezes margins, further cuts will only compound the problem. … I would offer that future Fed Funds cuts are off the table. "

It seems that those rate cuts are squeezing margin and will continue to do so, especially on those taxpayer funded capital injections. The terms on the preferred shares were 5% escalating to 9%! (See Compelling Banks To Lend At Bazooka Point for more details on the capital injections)

The prime lending rate is now 4%. Banks are guaranteed to lose money on that $250 billion Paulson forced down their throats if they lend it out to their least risky clients at prime.

Is it any wonder banks are reluctant to lend it? Instead banks are opting for mergers where they can cut employees to reduce costs. The NY Times made this sound like a conspiracy (See NY Times Lending Conspiracy Madness ) To me it sounds like unintended consequences of the bailout plan.

Key Interest Rates



Chart courtesy of Bloomberg .

So banks are paying 3.65% on one year CDs. Prime rate is 4.0%. Where is the profit? Take overhead into account and there isn't any. So why the high rates on deposits? The answer is banks are all competing with each other for capital. They need it to cover future losses on credit cards, foreclosures, REOs (bank owned real estate), commercial loans, etc.

ZIRP did not help Japan and it will not help US banks either. In fact, the rate cuts appear to be counterproductive. However, one cannot rule out the Fed cutting rates to 0% anyway. Bernanke is in academic wonderland and appears to be hell bent on sticking with his models regardless of how poorly those models perform in actual practice.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History