So, we missed it yesterday. But now you get reaction to the Fed’s decision to cut the US target rate to 0-0.25 per cent in charts! Lucky you.
From Bank of America:
To start, that’s the target rate vs the effective rate, or the weighted average of actual, negotiated rates between individual banks. The effective rate has been below the target rate for some time — and close to zero since the start of December. That’s why we’re seeing statements like this, from Capital Economics’ Paul Ashworth:
In practical terms, the decision to slash the target rate will do almost nothing to boost economic activity. However, it does send a strong message to the markets that the Fed means business, particularly when combined with the commitment to leave rates at near zero for some time.
BoA economist Peter Kretzmer goes even further:
In [cutting to 0.25 per cent], the FOMC adopted an aggressive posture, putting aside potential practical complications in implementing such a low fed funds rate target in favor of adopting a proactive strategy.
This is true — extremely low interest rates have a massive impact on money market funds and repo rates (both discussed here and here). In any case, however, the market’s reaction to the cut was positive, viz figure 2 below.
The important thing to remember though is that the euro and spot gold rallied too — figure 3. Just as some investors are betting that the US economy will recover quickly, there are others betting that the effects of quantitative easing — which the Fed explicitly admitted to yesterday, will devalue the US currency in favour of things like the euro and gold. Bank of America puts it well:
The risk of [the Fed’s strategy] remains turning a credit crisis into a currency crisis, with the latter holding an even greater risk for the long-term economic outlook than the former.
Of crucial importance to how the US currency fares will be Figure 7 below. That’s a chart of the money multiplier in recent months and it’s fallen close to 1 as banks refuse to lend to each other, helping to keep inflation in check. Once that starts kicking into action as banks begin lending, you could expect to see inflation make a comeback.
Related links:
Welcome to the roach motel - FT Alphaville
Escaping quantitative easing - FT Alphaville
The pictorial quantititative easing - FT Alphaville
Repos turning Japanese - FT Alphaville
How low rates break the buck - FT Alphaville
