J.P. Morgan sees Fed cutting rates to zero in Jan

[UpInArms]

Source: Reuters

NEW YORK (Reuters) – The Federal Reserve will lower its policy rate to zero percent by January in its attempt to avert a prolonged recession and to revive the struggling credit market, according to J.P. Morgan Securities analysts.

The Fed will likely hold its target rate on benchmark federal funds -- the overnight cost banks charge each other to borrow surplus reserves -- at zero at least through the end of 2009, J.P. Morgan analysts wrote in a research note published on Monday.

The Fed's fed fund target rate is currently 1.00 percent. The U.S. central bank began its rate-cutting campaign in September 2007 when the fed funds target was at 5.25 percent.

A number of analysts widely expect the Fed to lower the policy target rate to 0.50 percent at the end of its December 15-16 meeting. Some predict the U.S. economy may contract by an annualized 4.0 percent in the fourth quarter.

J.P. Morgan analysts now see the Fed stepping up its rate easing in conjunction with its various financing programs and proposed fiscal stimuli in the coming months.

Read more: http://news.yahoo.com/s/nm/20081201/bs_nm/us_usa_rates_jpmorgan

[DJ13]

1. ...and credit card rates will increase to 30% on average

Something is seriously screwed up here.

[Purveyor]

4. My last AMEX statement informed me that the interest rate was going up to 22% from 9.9%.

Never late, never overlimit.

Bastards. Taking taxpayer money for a bailout and then stick it to the public again by dramatically rising interest rates.

[SOS]

9. Same thing just happened to us

Amex just jacked us up to 22%.
In our state of NY this is actually loansharking, but surely the Amex gangsters are incorporated in Delaware.
Question: What can we do? I am looking into transferring the balance to another card.
Are you taking any action?
Any suggestions or ideas would be most welcome.

[TomInTib]

13. Cash

Our Galleries are taking in more cash than credit card sales, for the first time ever. And we are in one of the wealthiest (per capita) ZIPs in the country.

People with money are not going to pay that kind of interest.

[regnaD kciN]

21. Which card is that?

"Classic" American Express cards are charge, not credit, cards. You're expected to pay off the balance each month. Are you talking about their Optima (credit) cards?

[SOS]

23. Yes Optima

We have the regular card which we pay promptly every month.
It's the Optima that's suddenly become a nightmare.

[BrklynLiberal]

2. zero???

[muriel_volestrangler]

3. Can someone relate the *target* rate to anything in reality?

Does this actually mean the Fed will lend money, overnight, to lucky banks without asking for any interest at all? Or are they just saying they'd like banks to do that with each other - or get damn close to it?

Answering my own question: there is an effective rate published each day, which say what the weighted average of the rates at which banks lend to each other has been. The past 3 months has been the first time, in the 8 or so years the data is published for, in which the effective rate departs significantly departs from the target.

http://www.newyorkfed.org/charts/ff/

http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm

It dropped as low as 0.22% at the end of October; now it's 0.52%. Maybe the Fed is just admitting that the banks no longer pay attention to their 'target'.

[aggiesal]

5. The fed rate is the rate that ...

the Federal Reserve charges banks to borrow money.

This does not mean that the banks have to loan you any money at 0%.
But it does mean that the banks will only pay interest as minimal as possible.
This will affect the elderly who live on fixed incomes. A lot of elderly live off
the interest from their investments

Also, this does not mean that you will get a better rate on your mortgage.
When the fed rate goes down the bond rate goes up. Both affect mortgage
rates. I've seen the fed rate go down but because the bond rate goes up,
mortgage rates go up.

[muriel_volestrangler]

17. I suspect that isn't the precise definition

If you look at the 2 links I gave (especially the first, which gives graphs of the target, actual average in reality, and spread, for up to 8 years in the past) you see that each day there's a range of rates at which banks lend to each other - often at higher rates than the target, which I wouldn't think the borrowing bank would do if the Fed lent at cheaper rates.

But perhaps the Fed will always lend some money at that rate, after all, and this means there's a limit on how much the Fed will lend each day, and after that is reached, the banks have to make deals with each other as best they can. If so, then perhaps the recent divergence of the target rate, and the actual average rate it ends up at each night, indicates the Fed is lending very little money in this market - either because it doesn't want to, or because the banks that do have money to lend are willing to undercut the Fed, and lend it at 0.5% or so. Since that's way below what they lend to us mere mortals at, does that mean they've decided we're all such bad risks that only other banks can be trusted with the money?

[aggiesal]

27. The rate that banks lend to each other is not the Fed Rate.

The Fed Rate is the rate that the Federal Reserve charges the banks that borrow from the Federal Reserve.

One of the reasons that there is a credit crunch is that the banks do not trust each other anymore because of the bad mortgage loans that they've sold each other. The Fed is trying to get the banks to loan to each other, and one way to encourage this is by lowering the Fed Rate.

I don't believe this is the reason that the Fed wants to lower the rate again. I think they are trying to kick-start the economy, with this rate drop.

[muriel_volestrangler]

28. From my second link:

By trading government securities, the New York Fed affects the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight. The Federal Open Market Committee establishes the target rate for trading in the federal funds market.
...
The daily effective federal funds rate is a volume-weighted average of rates on trades arranged by major brokers. The effective rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision.

Note that what is reported when people say "the fed has dropped their rate" is that the target rate is dropped. And as the graph in the first link shows, the effective rate formerly followed the target rate closely, but has, over the last 3 months or so, varied fairly widely from it - and is currently under the target rate - and has been for at least a month now.

[bemildred]

6. Wheeee!.

Why not just outlaw usury?

[BunkerHill24]

7. That's good news...maybe we will see our credit card interest rates go down

on edit: I see many folks here thinking this move would do them nothing in terms of lower credit card rate.

I would assume the credit companies would never let go the higher risk rate consumers...after all, they the ones who make them money not paying their bills.

[high density]

8. How will that help?

The banks are already borrowing a record amount of money from the Fed for next to nothing, yet there is still a massive credit crunch.

[KoKo]

10. They seem to be targeting the Mortgage buyers....trying to reinflate "Home Ownership."

Figuring getting mortgage rates down by lowering interest rates to "0" they will get buyers back in market and allow refinancing of HELOC's. Some kind of "back door" attempt to reflate housing...or desperation because they don't know what the hell they are doing? :shrug:

[high density]

15. 30yr fixed mortgage is still at around 5.75%

Similar rates could be had about a year ago while the Fed funds rate was rising to 5.25%: http://library.hsh.com/?row_id=91

I dunno what they are trying to do, but banks seem to have no problem borrowing the money at the current 1%. The problem is that the banks aren't eager to lend that money even if it only costs them 1%.

[muriel_volestrangler]

19. They're already borrowing from each other at 0.5% - see links in #3 (nt)

[UpInArms]

16. just take that ? off the end and you have it, KoKo

they don't know what the hell they are doing

or, in the inverse, they do know and it is the worst possible thing for everyone but the top 1%

[jwirr]

11. To bad that is not retroactive to the borrower.

[rucky]

14. Banks are the only entities responsible enough to borrow at zero interest.

:rofl:

[CatholicEdHead]

12. Will this be the last bullet in the gun from the Fed?

After that there are no new options for the Obama Administration when it takes over at the end of Jan?

[UpInArms]

18. a tuneless song comes to mind

I didn't know the gun was loaded
and I'm so so sorry, my friend.
I didn't know the gun was loaded
and I'll never ever shoot it again."

[regnaD kciN]

20. No options in terms of interest rate cuts, but...

...that means they'll need to stimulate the economy through government spending programs rather than rate cuts.

[LaStrega]

22. That's as dismaying as the kink in my slinky.

'Xactly right about credit card percentage rates. Mine are going up, too.

Fuck it all.

:(

[Ecumenist]

24. Someone correct me if I'm wrong but didn't Japan do the same things

in the late 80's and 90's?

[Art_from_Ark]

25. Yes, Japan did that

But Japan is a nation of savers who left their money in the banks even when the semi-annual interest on a $10,000 passbook deposit was barely paying enough to buy a can of pop from a vending machine.

[judasdisney]

26. Max Keiser suggests "negative interest rates" are plausible in the minds of these clowns

They're already paying banks welfare money. Why not PAY banks to take loans? After interest rates are cut to zero, the remedies will become radicalized beyond the pale.

http://www.maxkeiser.com

http://www.karmabanqueradio.com