Fed’s rate cut closing in on zero
Today the Fed cut it’s target rate to a record low to “combat a severe financial crisis and prolonged recession.” And rather than cutting the key rate to a specific level, it established a target range of between 0% – 0.25%, leading one to believe that we are at the end of federal rate cuts for a long time.
“Federal Reserve Chairman Ben Bernanke and his colleagues said they will use unconventional methods to try to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century. For example, the Fed last month said it planned to purchase up to $600 billion in direct debt and mortgage-backed securities issued by big financial players including Fannie Mae and Freddie Mac in an effort to boost the availability of mortgage loans.”
Since rates can’t go lower, the Fed also hinted at various potential methods to support credit markets such as purchasing longer-term Treasury securities. And although Wall Street reacted in a VERY positive way today, I think we can assume worse economic times lie ahead.
Rate Cut affect on CD’s (certificate of deposits)
Although competition among banks has kept CD rates and savings accounts rates relatively high this year, one can assume we are about to see a steady decline in rates (esp. with the large mutli-national banks). Typically we get somewhat of a mirror image between fed rate targets and CD rates. Back in 2003, before the beginning of the housing bubble, the fed had reduced rates to near 1% and most banking consumers where hard pressed to find any CD’s yielding above 3% for durations of under 5 years.
December 16th, 2008 at 4:17 pm
Bank CDs and money market rates are not formally tied to the targeted federal funds rate, but they generally move in parallel. The last time the Fed rate was at 1 percent — for a year from mid-2002 to mid-2003 — CD rates plummeted to a little over 2 percent.
December 16th, 2008 at 7:49 pm
Nick, not so sure I agree. Banks are trying to increase deposits by aggressively advertising new CDs with attractive CD rates, so it may not be in their interest to reduce CD rates to match the Fed reduction.
December 17th, 2008 at 12:43 pm
yea the banks need money and they raise it via bank CD’s and MMA’s but when you can barrow money at rates this low who is going to give you superb CD rates?
March 11th, 2009 at 10:07 am
commercial mortgage loans…
It used to be that when you bought a home and didn’ t have a twenty percent down payment lying around, you had to pay what is known as private mortgage insurance (PMI). PMI is insurance that the lenders requires borrowers to pay to insure that the le…