29 October 2008

Fed Drops Interest Rates To Historic Lows

The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low . . . . ``If the economy weakens further, it may open the door for another 25 or 50 basis points in December,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.'' . . .

The Fed also lowered the discount rate a half point to 1.25 percent. . . [The Fed cut] the main rate during the past 13 months from 5.25 percent . . . The spread between the cost of overnight loans in New York and three-month dollar loans in London widened to 4.02 percent on Oct. 10 as investors fled risk following Lehman's Sept. 15 bankruptcy. The spread averaged 0.27 percentage point for all of last year. It has since fallen back to 2.5 percentage points. . . .

The Fed . . . agree[d] to finance the commercial paper issuance of General Electric Co. and other corporations and help money-market mutual funds raise cash to meet shareholder redemptions. . . .

The central bank's new loan programs have expanded assets on its balance sheet by 104 percent during the past year to $1.804 trillion, or 12.6 percent of GDP.

Borrowing costs have remained high. U.S. 30-year mortgage rates tracked by Freddie Mac were 6.04 percent last week versus 6.07 percent on Jan. 3.

From here.

The low interest rate news was so widely anticipated that the stock market has added nothing to a record surge yesterday in anticipation of an interest rate cut. The Dow closed down 99 points to 8,966, giving up some of yesterday's almost 899 point gain.

Major banks have followed suit, lowering the "prime rate" to 4.0%. As Wikipedia explains:

Six common indices in the United States are:

11th District Cost of Funds Index (COFI)
London Interbank Offered Rate (LIBOR)
12-month Treasury Average Index (MTA)
Constant Maturity Treasury (CMT)
National Average Contract Mortgage Rate
Bank Bill Swap Rate (BBSW)

In some countries, banks may publish a prime lending rate which is used as the index.

Loans based on the prime rate, or on Treasury rates are headed towards an interest rate decrease. Loans based on the LIBOR are headed towards an interest rate increase. National Average Contract Mortgage Rates are fairly stable, by comparison.

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