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So what happens with the Fed Funds rate goes to 0 ?


So what happens with the Fed Funds rate goes to 0 ?

Old 12-13-2008, 11:15 AM
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Default So what happens with the Fed Funds rate goes to 0 ?

The Federal Reserve is expected to cut the Fed Funds rate from 1% to 0.5% this week. With the rate reductions we're getting into a "no where else to go" scenario - another cut (maybe 2) and the rate will be at 0. What happens then ??
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Old 12-13-2008, 11:29 AM
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Default Re: So what happens with the Fed Funds rate goes to 0 ?

If I am reading the chart supplied in this link right,funds are at .14 % as of friday.I don't know that cutting to 0% will change much at this point.I do wonder how banks will handle this working under the borrow short,lend long program.The 10yr treasury rates are close to 0,they were negative at one point.Are we headed down the same road as japan has been on for the last ten years?

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Old 12-13-2008, 12:04 PM
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Default Re: So what happens with the Fed Funds rate goes to 0 ?

I think the govt. in their wisdom (I am making a joke as the govt. is mostly responsible for the economic crisis we are in) intends to cut fed funds (the rate a bank with excess reserves receives for loaning money back the Federal Reserve) with the intent to motivate banks to make loans. The govt. is taking away a reliable source (Fed Funds) of income from the banks. This in my opinion is possibly creating even more risk to the financial system as we know it. Banks will become more desperate to loan money and may consider making loans they otherwise would not as their reliable income from the Federal Reserve is being removed. When the economy was perceived to be good, banks were making money because they were making a plethora of loans. Most banks were loaning money to anyone with a pulse. Now banks are sucking wind and desperately need to make loans to generate income to survive. Taking away Fed Funds in essence should motivate banks to seek income elsewhere but this scenario is a double edged sword.
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