Another Rate Cut Coming?

In the wake of the turmoil in financial markets, the Federal Reserve met yesterday with representatives of the U.S. Treasury, financial services companies and state officials.  The Fed took steps to prevent a short-term cash crunch, as interbank rates jumped to more than triple the official rate.  They are also discussing measures to prevent a catastrophe from taking place at AIG, as the insurance company continues to try to shore up their balance sheet seeking sources of capital.

In addition to AIG seeking to resolve its problems, things were much worse for Lehman Brothers who is seeking chapter 11 bankruptcy protection.  LEH fell over 90% to 20 cents yesterday.  The other top story of the day was Bank of America’s buyout of Merril Lynch in an all-stock deal.  Bank of America shares were down over 20%.  The fed will continue to meet today and  a decision is expected around 2:15.

Through last week, there was no expectations of a rate cut.  However, yesterday sparked some hopes that the fed may decide to drop the federal funds rate to alleviate concerns surrounding the financial sector.  Interest rates may have to hit rock bottom to help those struggling to find capital.  I think that ultimately, the fed will have to allow some inflation to take place to help resolve many of the problems with credit and the economy.  If the fed doesn’t cut rates today, they may need to in the near future.  It has become exceedingly difficult for even large financial institutions to obtain capital, and without further reduction in interest rates these problems will continue.

Jobless rate falls to 9.7 percent in January

Related Posts: