The Fed Gets Zero For Zero

Guns a blazin’ since this financial crisis began, the Fed fired its final shot yesterday (Tuesday). It lowered the target range for the federal funds rate to 0% to 0.25%. Welcome to the United States of Japan!

In all seriousness, the federal funds rate is the rate (price) banks charge other banks on overnight deposits. It’s the primary monetary policy tool at the disposal of Ben Bernanke and the Federal Open Market Committee (FOMC). And the purpose of dropping rates is to encourage banks to borrow money and therefore invest more freely. In other words, it’s supposed to kick start economic activity.

But it’s not working.

As Patrick Jacq, senior fixed-income strategist for BNP Paribas SA tells Bloomberg, “There is no demand coming from the interbank market at all.” Instead they’re sitting on their hands, and mountains of cash.

Here’s the important takeaway. Aside from the one-offs like Blockbuster (BBI), which just secured a small loan. Or companies like Ford Motor Company (F) and General Motors Corp. (GM) standing in line to get a handout from the government, just like American International Group (AIG), lending activity is dead.

In fact, the Fed’s latest survey reveals 85% of banks tightened lending standards, despite the massive worldwide efforts to encourage the opposite.

Bottom line, no matter how much investors wish and push the markets higher, a lasting recovery isn’t possible until banks start doing their part. And right now, they’re doing zilch.

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