Tuesday, December 16, 2008


Today the Fed announced it would drop overnight interest rates by 75 to 100 basis points to the 0% - 0.25% range. This is a record low for the Federal Funds Rate, and it cannot go any lower than this.

It is hoped that lending money for free will increase credit, lending, and general economic activity. We haven't seen that with the prior interest rate drops, and we won't see it with this one either. Lending already reached its terminal limit when interest rates were in the 1-2% range in 2003-4. I anticipate credit will continue to contract faster than base money is issued and so deflationary trends will continue.

With the Fed's money printing since September, such that bank reserved have expanded seven-fold, a ZIRP has been the economic reality for over a month. This makes it official.

No comments: