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Strategies & Market Trends : Mu Gamma Lambda -- Ignore unavailable to you. Want to Upgrade?

To: Augustus Gloop who wrote (1434)	6/29/2001 11:12:58 AM
From: Diana	Read Replies (1) \| Respond to of 10077

Zero money, Gloopie! quote.bloomberg.com When the Fed lowers the fed funds rate today to either 3.50 percent or 3.75 percent, real interest rates will be close to zero (using the 3.6 percent year-over-year increase in the consumer price index, not Greenspan's preferred PCE price index excluding food and energy). What that means is the Fed is offering free loans to the banks. Every profit-maximizing institution should be lining up to borrow a bundle, using the cheap credit to buy Treasury notes yielding 5.25 percent. The 150 or 175 basis-point risk-free spread (credit risk, not market risk) between borrowing and lending rates goes right to their bottom line. And if a bank isn't doing that, its CEO should be hauled up in front of the board of directors and tarred and feathered. A zero real interest rate is unsustainable in a growing economy for the simple reason that it will lead to an explosion in money and credit. It was this realization that impelled Greenspan to start to raise rates in early 1994, once it was clear the economic expansion was getting some legs. That was probably the last time the Fed was proactive. I doubt the Fed will include any mention of zero real rates in its statement today because it's as interested in managing expectations as in managing the macro-economy. The last thing policy makers want to do is upset the stock market. But I'd wager that Greenspan is cognizant of the danger of zero real rates in an expanding economy, at least. ``Greenspan has always been an advocate of real-rate analysis,'' says Chris Low, chief economist at First Tennessee Capital Markets. ``I wouldn't be surprised if he had some ultimate target.'' Whether he does or doesn't, he isn't going to share it with the rest of us just yet. Still, zero real rates represent an obvious place for the Fed to pause.