World Rate Cuts

The Federal Reserve had cut the U.S. Fed Funds target interest rate to 1.00%.  The Bank of England on Nov. 6th made a somewhat surprise reduction in its interest rate to 3.00% from 4.50%.  That same day, the European Central Bank reduced its interest rate .50% to 3.25%.  The storyline of continued rate cuts was an extension from Oct. 8th, when the Federal Reserve and the central banks of Europe had announced a coordinated rate cut. 

The prospect of future rate cuts remains high.  At the time of the joint U.S and European interest rate cuts it was of great meaning that the rate cuts were coordinated with other central banks, including in the U.K., the euro zone, Canada, Sweden and Switzerland. Furthermore, near to this stage of the crisis, China, Hong Kong and Australia also lowered their rates.  Now, coordinated rate cuts are probably of little importance as each country contends with their own demons.  Europeans fighting inflation late into the credit crisis was probably a mistake.  These countries may now be plating catch up when they reduce interest rates further.  Commodities prices are down drastically, wages will continue to be under pressure, the only factor influencing inflation is going to be government deficits and the will take some before the damage can be fully appreciated.  Outliers, or countries with unusually high interest rates are trying to save their currency, an avoid economic hopelessness brought on by a severely depressed currency.

The effect of rate cuts is aiding the thaw in credit markets.  This combined with the remarkable steps taken by the U.S. Treasury; increases in FDIC insurance, guarantees on money market funds, injections of capital into the banking system have all contributed demonstrably to the continued effort to stabilize credit. 

However, an economic recession is not going to be avoided by shoring up the banking system and the tools of credit alone.  Housing was over inflated, car sales will not rebound to the last five year average anytime soon, home prices will stabilize but not the number of units sold.  Credit levels can never go back to where they were in the last 20 years.  Rates will almost certainly drift lower but economic malaise is a sickness they will not be cured by interest rate reductions.

This entry was posted on Thursday, November 13th, 2008 at 2:53 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.