The coordinated rate cut was the right thing to do. But I don’t expect much from it — because the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system.
A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels.
So will this latest rate cut make any difference to borrowers? Maybe — but only to a few of them. We’re way past the point at which conventional monetary policy has much traction.
Related Posts :
- 10/9/2008 : Market Panic
- Does Morgan Stanley(MS) Need To Raise $30 Billion?
- Oct 8, 2008 - Market Wrap
- Futures Surge After Global Rate Cut
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