This is a pretty big deal. I’m not nearly economically educated enough to realize the full implications, but it should mean lower loan and mortgage rates. It also makes stocks more attractive for a number of reasons, so stocks should go up.
With the latest reduction, the federal funds rate is far below the rate of inflation, meaning that the “real,” or inflation-adjusted, rate is below zero. It is also well below the European Central Bank’s benchmark interest rate of 4 percent or the Bank of England’s rate of 5.25 percent.
That, however, could be troublesome — again for reasons I’m not qualified to understand or explain. With this, the government could borrow money, stick it in a no-risk inflation-based investment such as a CD, then pay it back… and make a profit. Something tells me that’s not a good idea.
But if I figure correctly, this should also send CD and savings rates plummeting. Do you have one of those “high-yield” savings accounts from ING or HSBC Direct? Expect a friendly email soon to tell you that the rate is decreasing to something pathetic. (I’d be surprised to see any savings account offering more than 2.5% in a few weeks.)