Problems With Rate Cut

Possible problems with the rate cut.

Floyd Norris:

"Of course, a business that needs cash will be no better off if it can’t borrow at a lower rate than it was when it could not borrow at a higher rate."

Paul Krugman:

"The coordinated rate cut was the right thing to do. But I don’t expect much from it — because the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system.

A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels.

So will this latest rate cut make any difference to borrowers? Maybe — but only to a few of them. We’re way past the point at which conventional monetary policy has much traction."

Here's what William Gross said about the possible rate cut:

"Whether these steps are successful depends in part on whether fear of fear itself has gone too far. They also depend on global coordination of policy because American-style capitalism is not just the bastion of America anymore. Almost all important economies have adopted it in one form or another and in doing so have assumed its inherent instabilities as well."

Let the coordination begin!