Author Topic: the Fed lowers rate to 0%  (Read 748 times)

MustacheAndaHalf

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the Fed lowers rate to 0%
« on: March 15, 2020, 07:06:19 PM »
"The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent."
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm

There should be an impact to bond yields, although not necessarily 1:1.  A 2 year bond and 30 year bond might react differently.  I'll be watching the stock market open on Monday to see how 20y/30y Treasuries react.

bwall

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Re: the Fed lowers rate to 0%
« Reply #1 on: March 16, 2020, 04:24:53 AM »
Lowering rates is just going to rattle the markets. It indicates how much fear the Fed has about the Coronavirus. The problem isn't the money supply or the cost of money, it's policy.
And that's the biggest problem. D.C. is so jacked up now and Trump doesn't know what to do to fix the situation. Mnuchin is now saying that there won't be a recession, as if it can be wished away by talking it away. This isn't a problem that can be solved by the market, it takes government action. Which is why the pre-market  futures are down over 1,000 points--that's the market's assessment of the ability of this administration to fight the problem.

MustacheAndaHalf

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Re: the Fed lowers rate to 0%
« Reply #2 on: March 16, 2020, 09:45:35 AM »
Listening to Mohamed A. El-Erian has been interesting.  He's called lowering interest rates "pushing on a string - it does nothing".  When people are afraid to leave home, that's a "demand" shock that can't be addressed by lower interest rates.  Lowering interest rates doesn't calm people's fears of this epidemic.  Mr El-Erian goes on to suggest the Fed should be laser focused on proper functioning of markets, like the Treasury market distortions seen last week (he made his comments when Treasury bid-ask spreads were widening, before the Fed stepped in to provide additional liquidity).

effigy98

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Re: the Fed lowers rate to 0%
« Reply #3 on: March 16, 2020, 09:50:02 AM »
This is a placebo and does nothing to fix the actual problem of people being scared and not spending. There is going to be major supply shocks in the system and many people are going to be unemployed. Unemployment insurance does not cover most peoples basic expenses and with no savings to fall back on they are in trouble!

MustacheAndaHalf

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Re: the Fed lowers rate to 0%
« Reply #4 on: March 16, 2020, 09:58:48 AM »
I'll flip sides and play devil's advocate on this.  Right now, businesses are frightened and considering laying off employees as their income evaporates.  The Fed wants cheap money available, but it doesn't make loans directly to businesses.  Only to banks.  So it lowers interest rates, and sets lower limits on what bank's need to keep in the vault, and waits.

When businesses drawn on their credit lines (some have already), the hope is banks will be able to provide that credit.  Businesses will take out loans to stay in business, and those loans will be very cheap, because the banks are getting money very cheap (near 0% rates).  So I think that's the target: make sure businesses can stay afloat if they go to banks asking for loans.

There's another factor Mr El-Erian brought up which is far more disturbing: stopped economies.  He claims they are much harder to restart than people think.  He mentioned something about supply and demand both shrinking.  Companies shut down factories for lack of demand, and that creates a lack of supply for later?  Something like that.