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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (89587)	11/2/2008 8:43:00 PM
From: Elroy Jetson	4 Recommendations Read Replies (1) \| Respond to of 116555

Merely zero interest rates? How passé. The Saint Louis Federal Reserve Bank issued a work paper two years ago or so which detailed the method for negative interest rates by requiring periodic tax stamps on currency, or currency which would be discounted by it's expiration date. This plan merely needs the creation of a widespread Monetary Police Force, no doubt part of Homeland Security. .

To: mishedlo who wrote (89587)	11/2/2008 9:45:40 PM
From: Crimson Ghost	1 Recommendation Read Replies (1) \| Respond to of 116555

Why the Fed cannot cut to zero MARKET MOVERS by Felix Salmon There's been lots of talk in recent days of the "zero bound" on the Fed funds rate -- which is exactly where the Taylor Rule would put it. But the real bound might be halfway between here and there, at 50bp. "Beyond that," as Greg Ip says in the Economist this week, "things get tricky" : If the Fed did target zero, it might encourage banks just to leave their money at the Fed rather than lend it to each other, causing the federal funds market to dry up. It would also make it hard for money market mutual funds to pay a competitive yield and cover their operating expenses. Money would flow out of them and into government-guaranteed bank deposits, straining bank capital ratios. Tracy Alloway has much more on the money-market issue today: it turns out that 26% of all money-market funds charge more than 50bp in fees alone. Of course, money-market funds should be able to get more than the bare Fed funds rate on their money -- but the actual rate has been undershooting the target rate quite consistently of late, and in any case investors expect some non-negligible interest rate on their funds. Any broad-based move out of money-market funds and into bank deposits wouldn't just strain bank capital ratios, it would also devastate the CP markets, where such funds are extremely important buyers. Alloway also mentions that below 50bp we'd be likely to get many more repo fails -- which would significantly damage one of the few remaining sources of reliable liquidity. Which implies, given the way in which real-world interest rates have barely budged in the face of Fed easing, that the downside to cutting past 50bp is significantly greater than any upside. There might be another half-point in rate cuts in the offing, but beyond that, the Fed will probably cut no further.