Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges.
Paul Krugman notes that for the US, we’re way past the point at which conventional monetary policy has much traction. So he does not expect much from the rate cut.
The trouble with rate cuts
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.
I wonder who are the few who will benefit from the rate cut.
I found a paper that denies one of my two obvious thoughts about
originalism, so stating the obvious turns out to be useful!
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After a couple days to think on it, I think this post is right on. I just
stumbled on a paper that stumbles, badly, over one of my two obvious
thoughts abo...
1 day ago
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