Wednesday, 17 December 2008

ZIRP it is

The fed funds rate is officially zero now. Bloomberg reports:

The Federal Reserve cut the main U.S. interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter- century.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

... The Fed said today it will target a federal funds rate of between zero and 0.25 percent, a reduction from the 1 percent level that the Fed failed to hit.

Data released on Tuesday provided additional justification for the move, if any is needed. From Reuters:

The Labor Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. Core prices, which exclude food and energy items, were flat in November after declining 0.1 percent in October...

The Commerce Department said housing starts dropped 18.9 percent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.

Wall Street took its cue from the Fed move. Again from Reuters:

Stocks rallied on Tuesday after the Federal Reserve rewrote its playbook by slashing borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations...

The Dow Jones industrial average rose 359.61 points, or 4.20 percent, to 8,924.14. The Standard & Poor's 500 Index jumped 44.61 points, or 5.14 percent, to 913.18. The Nasdaq Composite Index climbed 81.55 points, or 5.41 percent, to 1,589.89.

And predictably, Treasury yields fell. From Bloomberg:

Treasuries surged, pushing yields to record lows, after the Federal Reserve cut the main U.S. interest rate to near zero percent and said central bankers will buy debt to ease the longest recession in a quarter-century...

The yield on the 30-year bond tumbled 24 basis points, or 0.24 percentage point, to 2.717 percent at 5:44 p.m. in New York, according to BGCantor Market Data. That’s the lowest since regular sales of the bond began in 1977. The price of the 4.5 percent security due in May 2038 rose 5 21/32, or $56.56 per $1,000 face amount, to 135 30/32.

Among economic data reported elsewhere on Tuesday, the UK reported that consumer prices fell 0.1 percent in November to bring the annual inflation rate down to 4.1 percent from 4.5 percent in October while in the euro area, manufacturing and service industries contracted in December at the fastest pace in at least a decade according to Markit's purchasing managers' survey.

In other central bank news, Saudi Arabia cut its main repurchase rate to 2.5 percent from 3 percent but the ECB appears reluctant to cut interest rates further, President Jean-Claude Trichet saying that it wants to “concentrate at this stage on getting what we already decided to be really operational”.

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