Fed Drops Interest Rates To Near Zero
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I am not sure what this will do to home sales, but the benchmark rate hitting near zero can not be great.
Sure mortgage rates will drop, but the banks are essentially saying that .25% is a great rate and banks should be happy to have money that is stagnant but not losing is a good investment.
The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use “all available tools” to combat a severe financial crisis and prolonged recession.
The central bank says it reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October.
Get the feeling this is not what Bernanke signed up for when he took the job as Federal Reserve Chairman?
UPDATE: Pat Kitano think that this is a good thing for the housing market. He has 3 good reasons why. I trust Pat.
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Comment by Arno on 16 December 2008:
The bullets may have been exhausted in terms of interest rate reductions, but Uncle Ben certainly is not out of ideas. He is obviously not opposed to interjecting enormous risk into the federal reserve by buying up overpriced mortgage assets. And eventually, it is certain, that policy changes will push consumers into 100 year mortgages like Japan.
Comment by Daniel on 17 December 2008:
That is True Arno. Along with this interest rate reduction in many countries including US, they have also started offering insurance of the same amount as that of loan. Is it true?
Comment by Christian on 24 December 2008:
Seriously guys? How can it be argued that lowering the rate is good for home sales? Granted I’ve heard this over and over, but no one has shown me a good reason for this being the right action to take. Credit is freezing everywhere because there’s no incentive to lend, and now we’re inflating our currency even further, just treading water and we think this is the right play? Mortgage rates ought to be in the double digits right now. The only right action is to slow things down, let the banks swim in inventory, and the market will force them to sell at fire sale prices to buyers who have an actual down payment. Will many of them go belly up? Probably. But it will put home prices where they need to be. Instead, we’re destroying our dollars and keeping our pricing artificially higher than it ought to be. All we’re doing is prolonging this recession, possibly even causing a depression.
Comment by Christian on 24 December 2008:
OK I should correct myself…lowering the rates IS good, short term, for home sales. But horrible for the economy, bad for the world and possibly cataclysmic for the dollar.