Comments on: Fed Cuts Federal Funds Rate By 3/4 Point

By: Mockinbird

Mockinbird — Tue, 22 Jan 2008 22:39:12 +0000

Thanks to you both for the refresher. I needed it.

By: NortonPete

NortonPete — Tue, 22 Jan 2008 20:31:42 +0000

The best customers might pay less, but in general, borrowing requirements will be stricter for everyone. A startup company might not be able to borrow and a company with a bad balance sheet will pay more.
It all makes sense but there has been such a pullback in lending that the Fed is concerned.
The Fed funds rate is actually not set by the Fed directly! The Fed funds rate is the rate agreed between banks and is set by them. The FOMC or “Fed” sets a target by lending money to banks through repurchase agreements using Treasury bonds. The competition between banks to put that money to work is what sets the Fed fund rate. The Fed only controls the discount rate which is higher and is the rate a bank gets if it just walks up to the Fed and says “I need money”.
So the Fed took actions that caused the banks to lower the Fed funds rate. Real clear right?

By: feeblemind

feeblemind — Tue, 22 Jan 2008 20:02:01 +0000

NortonPete: Thanks for the reply. I guess my question to boils down to this: Are business borrowers going to be paying higher rates for money even as the Fed cuts rates? Your comment about the commercial paper market leads me to think they will. And if that is true it will be a fairly unique situation as bank lending rates and the Fed rates generally trend in the same direction. Hmmm…..

By: NortonPete

NortonPete — Tue, 22 Jan 2008 19:34:31 +0000

It should say “these are short term bonds”
and its “pouring money”
so I reread my posts and spell check them but it appears hopeless.

By: NortonPete

NortonPete — Tue, 22 Jan 2008 19:31:37 +0000

Feeblemind,
In some respects it already has but I feel it is in a good way. Auto loan requirements are already stricter and so are mortgages. American Express just took a 275 million charge for credit card defaults. Somehow everyone will have to “chip in” and pay for that.

But the concern now is with the commercial paper market, this are short term bonds issued by corporations to fund their day to day operations. Ford might issue commercial paper to fund car loans. The market is dead, everybody is afraid to buy them fearing defaults.
This must change or it will seriously restrict the economy. This is why the fed is pooring money in through “repo” market or repurchase agreements, and hopefully it will work.

By: feeblemind

feeblemind — Tue, 22 Jan 2008 19:08:18 +0000

NortonPete: Do you think the credit crunch will spill over into commercial lending, with banks being much more cautious about loaning money to businesses, even to good customers?

By: bill-tb

bill-tb — Tue, 22 Jan 2008 15:15:23 +0000

I guess the fed finally realized that gasoline prices had gone up. Like Greenspan before, they never seem to learn.

I you want to know what the root cause of the housing meltdown, google “ADDI 2003″. Look at the hits under housing, skip the rest. You won’t find this under news … Bet most never heard of this.

By: NortonPete

NortonPete — Tue, 22 Jan 2008 14:13:32 +0000

Bad timing for the rate cut, it makes the situation look even worse. The problem is a credit and liquidity problem which might cause a recession or worse.
A recession generally is two quarters of flat or slightly negative growth and a sizeable increase in unemployment, which we have not had.
The reason this is worldwide has to do with the fact that banks worldwide bought CDOs or Collateralized Debt Obligations which contained a percentage of sub-prime debt. Now nobody wants them.
French banks, German banks even Chinese banks have debt that cannot be evaluated. These banks are required to hold investment grade bonds and these debt instruments are now being downgraded.
It will force a fire sale of trillions of dollars in bonds.