FED cuts rate

tradetime

Some of the Economic Textbooks might need re-writing after we are done with this Recession.

:rotfl::rotfl:Yes I think there will be some furious writing done after this, even if its in animal dye on cave walls.

WTF?_2

purch wrote: »

In theory that should be the case, but the way that things are shaping at the moment it is hard to predict what might happen.

People seem quite happy to buy T Bills with virtually zero yield, rather than even consider touching something with a higher yield and only a tiny amount of risk.

The huge amount of new Bonds that will be required in the US, UK and around the World should drive prices lower and yields higher, even if the Central Banks buy some of the issuance.

But currently it appears what should happen in theory isn't happening.

Some of the Economic Textbooks might need re-writing after we are done with this Recession.

I reckon the appetite for bonds is a reflection of the fear and lack of confidence out there in the financial system, the stock markets and the commodities markets. Plus the volatility in FX. I don't think it's particularly because of the inflationary/deflationary outlook and people saying "oh well, I don't really need to make a return because there will be deflation". They could loan it to a major bank and get quite a healthy return on the cash instead. The fact that they prefer to buy bonds with next to no yield speaks volumes about faith in the financial system.

Clearly there is a lot of money out there that people just want to preserve, even if it means making no return (or even a slight loss) on it. Putting it into short term government bonds from the US is just about the best way to keep your money intact. They could try gold but that market fluctuates according to speculation and they risk potential losses at a time when risk aversion is the name of the game. With bonds you know what you will get and it's more or less the surest thing there can be.

But: If the Fed starts printing money in earnest to the point where inflation looks even moderately likely then they risk people moving out of US government bonds extremely quickly and dumping dollars onto the market, causing massive inflation in the US as hundreds of billions, trillions even, of foreign-held dollars are repatriated.

They are walking a tightrope over Niagara Falls. It's typical of the arrogance displayed by the whole George Bush regime in general. They seem to think that they can just do as they please and the rest of the world will fall into line.

WTF?_2

stevetodd wrote: »

Cut to 0.25%, wow bigger than expected, in fact they are saying cut to a range of 0 to 0.25%, not sure what they mean by that but they are calling it a 0.75% cut on Bloomberg

All the cuts so far not doing a whole lot to address the lack of capital available to lend (into a risky market) in the first place, thus supply:demand for credit pushes the real world rates a lot higher than the Central Bank ones.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZBA3Luek4AY&refer=worldwide

Dec. 17 (Bloomberg) -- For all their efforts to liquefy credit markets, the Federal Reserve and the Treasury show no signs of ending the 18-month freeze, as evidenced by the unprecedented gap between what banks and the U.S. government pay to borrow money.

The difference between the London interbank offered rate, or Libor, that banks charge each other for three-month loans and Treasury bill rates is six times wider than before markets began to seize up in June 2007. Even though the so-called TED spread narrowed to 1.55 percentage points from 4.64 percentage points in October, prices of contracts to borrow money months from now show investors don’t expect lending to recover until at least the second half of 2009.

“If you take a full assessment of the credit markets, conditions have certainly eased from their worst, but they still are at extraordinary tight levels, which are far from normal,” said Michael Darda, the chief economist at MKM Partners LP in Greenwich, Connecticut. “Short-term funding spreads are all still very wide relative to historical norms. There is a massive pullback going on in the private sector.”