Academic

The Rate Cut

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Central banks around the world -- even China! -- are cutting interest rates. So what exactly is supposed to happen now?

Bankrate senior financial analyst Greg McBride has a nice analysis of the implications of the rate cut for consumers. His bottom line: this hurts savers (lower CD rates) and doesn't incite new borrowing, but helps some people who have an adjustable rate mortgage. Hmm.

Most of the talk about the rate cut looks like this from Don Rissmiller, of Strategas Research Partners in New York: "A coordinated rate cut is symbolic as much as anything else. It's the most traditional tool that central banks have at their disposal, its readily understood by everyone in the markets, and by deploying it, they therefore hope to instill confidence."

Instill confidence. That is the mantra. Watch David Wessel of the WSJ ...

So if everyone believes that the rate cut is mostly symbolic, why would we think that it should instill confidence?

No need to answer that. It's a rhetorical question. Just note that the rate cut didn't stop markets around the world from sliding further. FT sums it up nicely: "Markets shrug off rate cut."

UPDATE: I posted this, went to get some lunch, and came back to find that the market has done an about face. CNBC commentators are speculating that stock traders are seeing some hopeful signs in the credit markets.

Full post as published by Conglomerate on October 08, 2008 (boomark / email).