As Wall Street investors and economists expected' after considering markets volatility and disappointed figures of economic performance indicators that Fed might consider the further rate cut, probably in December as its last regularly scheduled meeting this year. On Friday Nov.14, The Federal Reserve Chairman Ben Bernanke while speaking at banking conference in Frankfurt, Germany, also indicated that the Fed is closely monitoring the situation and stand ready to take additional steps as required.Generally Fed lowers Interest rate to spur economic growth, with lower costs of financing that encourage borrowing and investing under normal economic conditions.
The Fed's key rate is now at 1 percent after the October ending rate cut of half percentage point, which by itself has not made much difference. Since the financial markets crisis, the Fed has used almost every tool to help sustaining the financial system, which includes paying hundreds of billions for mortgage-related investments, commercial paper, other assets no one else wants and also the interest rate cut without even worrying about inflation.
The typical situation silently emerging for the ordinary people or investors as the average inflation comes out around 4% for the year (source: inflationdata.com). The question arises, where to keep whatever money or liquidity left with a common man, if any? Markets are volatile and highly risky, bonds investments are long term and with huge negative difference in interest rate and inflation the value of money eventually decrease in the bank deposit, no place has left to park liquid funds. The answer might be to keep the money as old secret cash-in-the-mattress policy.
Lower interest rates surely impact the total amount of saving accounts figure, reducing deposit and overall condition of the banks that already deteriorated during financial crisis. Decreasing credit rates due to decrease in interest rate attracts criticism from many experts, the move indicates that not much options have left with policy makers and that is the reason for doing more of something that doesn't work, also remember in the very first place cheap or easy money has what got the financial system into trouble.
Government wants to influence financial markets as staying proactive by directing the central bank to the particular moves. Interest rate cut always considered as the most important weapon with fed to generate more liquidity in financial markets. Also there are limits to what the central bank can do and how far under the fiscal policy.
The uncertainty has shattered the market sentiment and we know that it will take time before confidence is re-established. Interest rates cut prove beneficial with mortgage payments of home financing, but the impact depends on what type of mortgage the consumer has, fixed or adjustable. Whenever Fed issues a rate cut, adjustable-rate mortgage (ARM) payments decreases but Fixed-rate mortgage (FRM) remain unchanged.
U.S. mortgage applications increased during last trading week, recovered from an almost 8-year low, as potential home loan borrowers took advantage of a sharp drop in interest rates.
While concluding I think’ Any further decision on rate cut will send a wrong signal that the efforts of US authorities with the help of aggressive Fed intervention failed to stabilize the markets and to prevent the US economy sliding into recession. Also it is not certain that even how much of the rate cuts will be enough to calm the volatile markets and avoid any economic downturn in the longer term.
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