Fed Chairman Bernanke Lowers Rate Here and Abroad

Author: Rob K. Blake | Date: October 8, 2008 | Filed In: Mortgage Rates

Federal Reserve Chairman Ben Bernanke orchestrated a gaggle of European central banks today to cut interest rates by a half percent which is designed to quell the sell-off that has gripped the world’s stock markets in the last two days. European stock markets rebounded on the report and the US futures market about-faced as well.

Emergency Rate Cut - Global Damage Control

Bernanke’s goal was to break the logjam of bank’s not lending to other banks and to stop hording their cash. The banks’ horded cash must go somewhere and of late it is going into the safety of the Treasury bond markets of governments around the world. Ben’s goal is make this option pay less…lowering global rates will do that. Now let’s hope the banks’ take the bait, stop hording cash, pull it out of the bond markets…and start lending to each other again.

One measure you can watch to see the effectiveness of the emergency rate cut strategy is the Libor OIS down…the Ted Spread is another measure. To read my post on TED spread, click the link.

I took a snapshot just now of Bloomberg’s TED Spread on a 1 month graph…see below. The graph shows some decline…but as you can see at the bottom we have a long way to drop to get back to normal.

I also put up Bloomberg’s Libor-OIS…in a one month graph…you can see this measure has yet to turn downward. Let’s hope it does sooner rather than later.

This is a maneuver that won’t work like a flipping a switch…it will take a few days or weeks to tell. So be patient.

Canada, England, Sweden, Switzerland and the European Central Bank all pitched in to help. Actually this probably should have been executed 10 days ago when everyone noticed the TED spread increasing….

Oh, that’s right…without a calamity, there would be no $700 Billion banking bailout needed…what was I thinking.

You’ve got to give it to old Ben, when he wants something, he goes right after it. Getting other Central banks to do what he wants them to do, is no easy task. They all have their own country’s interests in mind and to subjugate those to Ben’s wishes is not something they relish.

But Ben got it done….let’s just hope it works, so we can get back to a normal level of panic.

Good Luck!

PS: Here’s a Bloomberg video clip on the emergency rate cut and the world’s central banks participation…

Author: Rob K. Blake