Excerpt from: GFT Analysts in the News
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| December 16, 2008 | | New Fed Funds rate of 0.25% |
Japan, look out! The U.S. is planning to beat you in a race to the bottom. The probability of a 0% Fed rate just got more likely today. The Federal Reserve just cut the Funds rate by 75 basis points to 0.25%.
The decision was unanimous, and the move is sending the U.S. stock market immediately higher. The Fed has vowed to use every tool in its toolbox for economic stimulus, and this is just one of the steps it is taking.
However, the true effectiveness of this move will depend largely on banks. While the Fed Funds rate provides a discount to banks for their lending, it remains to be seen whether this will encourage banks to lend to consumers. Sure, consumers will want to borrow -- but they may not be able to, due to tighter lending standards.
If the banks do lend more, however, it could stimulate the economy. But that will be the real question. Indeed, if even a 0% Fed can't stimulate the economy, it may diminish the relevance of the Federal Reserve overall.
The U.S. dollar, as expected, is down in forex trading on this news. A lower rate is seen as a sign of a weak economy, and economic weakness does not usually support a currency. However, if the move does work, and lending does spur consumer spending again, there could be some strength ahead for the U.S. dollar.
| Topic Tags: 0% Fed rate, Fed Funds rate, Fed rate 0.25%, Fed rate cut, forex trading, stock market, U.S. dollar | |
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