Everything You Need To Know About The Fed’s Rate Cuts

The graphic below contains all you need to know about the Fed’s rate cuts over the past year:

Graphic Courtesy of the WSJ

Notice how the Fed’s rate cuts have had little effect on mortgage rates and corporate bonds rates? Thus lending credence to my theory from last year (after the first rate cut) that the rate cuts would have little impact on the credit crunch since it was a function of loan losses, bad risk management, investors losing money, derivatives abuse, etc, as opposed to being a function of high interest rates.

Taking it a bit further: you can cut interest rates to zero and it won’t change the reality of overleveraged and undercapitalized banks that are facing escalating loan losses, or a nation full of borrowers that are either overleveraged (in general) and/or struggling with mortgages they can’t afford.

Not to mention the fact that it’s illogical to think that you can solve a problem that was partially caused by low interest rates with low interest rates.

Now I suppose you could interpret this to mean that things would be markedly worse without the Fed’s rate cuts. You could also say that the Fed simply misinterpreted the impact of their rate cuts on the credit crunch; after all weren’t the rate cuts supposed to make mortgage rates fall, give relief to ARM borrowers, etc?

Either way the Federal Reserve and Wall St. have both become over dependent on rate cuts as a way to generate growth, and now with interest rates at 1.0% maybe both parties will begin to focus on the economy’s actual problems instead of hoping rate cuts will magically fix things.

Of course we have a nation of analysts, pundits, politicians and policy makers who can’t seem to tell the difference between a root cause problem and a symptom, so perhaps I’m being too optimistic.

You can read more here.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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