Rich,.. Re:But lowering them would leave more room for the bond market to drop even further, right?
The Fed Funds rate (currently at 5.5%) is the rate at which
a. overnight rates at which member banks can borrow - now = 5.5%
b. also, money used by the Fed to pay for it's purchase of government securities
c. also, funds used to settle transactions when there is no float.
The Discount rate (currently 5.25%) is
a. the interest rate the Fed charges member banks for loans using government securities and provides a floor on interest rates.
b. the interest rate used to determine the present value of future cash flows.
So if the Fed lowers the Fed funds from 5.5% to 5.25%, this simply provides more liquidity. If they lower the discount rate as well, the whole yield curve moves to a lower level which means the cost of long term borrowing is reduced.
The bond market doesn't now seem to be constrained by the current interest rates as long rates got as low as 5.044 today due to temporary storage of funds because of market volatility. Eventually, if Japan restructures, and a floor is established, then US bonds will eventually start trading according to DOMESTIC economic fundamentals. The current yield is distorted by the global economic conditions. Lowering the Fed Funds or discount rate next Tuesday won't address the problems contributing to the overall market weakness. Tietmeyer already stated there would NOT be a concerted G7 effort to reduce rates globally.
Also, if you get a chance to look at a long term chart of the JGB (Japanese Government Bond) versus the Nikkei you will notice that once they diverged, low rates did not help or otherwise do anything to alter the course of the Nikkei. In the end, it is corporate earnings and US corporate earnings were outstanding in the past 3 years, even with interest rates at the 7% level.
So it is a stretch to imagine that lower rates will turn everything around. The one thing that lower rates will do is to weaken a strong dollar which will in turn make commodities more affordable since most are priced in US $.
Regards,
Lee |
