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  • December 16, 2008 03:54 PM EST by Brian Sullivan

    A New Fed World: Goodbye Even Numbers, Hello Ranges

    It wasn't a surprise the Fed cut interest rates today.   The surprise was in how they cut them and by how much.   They cut to 0%.   And they cut to 0.25%.   Confused?  I was too at first.

    We are used to cuts to nice, even numbers.   1/2 a percentage point (or 50 basis points) was expected.   We instead got more of a cut, at least 3/4th of a percentage point.    We say "at least" because the Fed went back to what it used to do, set a target range and not a firm number.  It will let the market handle the in-betweens of 0% to 0.25%.

    From FOX Business economist Mark Lieberman:

    The Federal Open Market Committee today agreed unanimously to cut the Fed Funds rate to a target range of 0% to 0.25%, the lowest rate in the Federal Reserve’s 95-year history.

    In the statement announcing its decision, the FOMC said since its last meeting “labor markets have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.”

    The Committee added: “overall, the outlook for economic activity has weakened further.”

    The unusual step of establishing a range for the Fed Funds rate took most analysts by surprise. The consensus forecast had been for a ½ percentage point cut to 0.50%.

    In the 1989 the FOMC established a range of 9.50% to 9.625% for the Fed Funds rate. Ranges had been a fairly common action by the FOMC before decisions were announced publicly while Alan Greenspan was chairman of the Federal Reserve. Prior to those public announcements, analysts had to discern the FOMC’s decision by its subsequent transactions involving Treasury securities. In its statement, the Committee said the Federal Reserve “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

    Those tools, the Committee said, would mean the Federal Reserve “will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

    The effect of these actions, would the Committee believes, bring down interest rates and unclog stalled credit markets. The FOMC’s action means consumers could see lower rates for home equity lines of credit, credit cards and auto loans since those loans are generally linked to the prime interest rate which is set at three percentage points above the Fed Funds rate. Mortgage rates are not directly affected as those rates are tied to rates for treasury borrowings which don’t react as quickly. But the real target of the FOMC’s action was the broader financial services sector, providing more money for banks.

    Since the effect of the FOMC action was to increase the money supply, the new buzzword for future Committee actions is “quantitative easing” in which the Federal Reserve increased the money supply through actions which would have the same effect as lowering the rate – without though necessarily affecting the prime rate and related rates.

    Minutes of this FOMC meeting will be released on January 6. The FOMC’s next scheduled meeting is January 27-28.

    This goes along the lines of what we talked about on the program today, the effective Fed funds rate.  That rate, while based on the Fed's target rate, is actually floating and is set more by the market.

    The video below walks through the idea and hopefully sheds some light.  We are going to have to learn to live with ranges and less with nice, round numbers.


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Patrick Norton

Federal Reserve “will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. Currently the U.S. Departments of Housing and Urban Development (HUD), Agriculture (USDA/Rural Development), and Veterans Affairs (VA) have homes listed? I understand most of you are into numbers and economy. How many vaccant homes with broken plumbing, five roofs, foundations cracks, 1970's carpet can the taxpayers afford? They sit abandoned for years and even the homeless think twice about the legal regime of the assets belonging to the public domain and moving into these unsafe properties. All seem to be mortgage-backed securities with the numbers of loans to friends and brokers off the chart. This must be part of all the jobs president O'bummer is talking about, buy all these slum landlord properties at 120% over market value (current default loan value) then tear them down and build new prisons to house all the families who "gave up" and refuse to work. I think we need drug tests on all of our elected officers; they must be smoking crack!

December 17, 2008 at 10:46 am

movers

The lower fed rates will have little to no positive influence on this market. Business and the consumer will pull economy up.....if and when it comes back.

December 17, 2008 at 10:02 am

Mark Evans

The good news: Lowering interest rates have a history of improving the economy by lowering borrowing costs for business, home loans, car loans and credit cards. Fuel costs are the lowest we have had in four years and food costs are declining too. Housing is more affordable and so are cars. Social Security checks are increasing in January yet the cost of living now is actually going down. The future looks bright indeed. Hang in there and do not despair...the economy in America always recovers to be better than ever before.

December 17, 2008 at 9:02 am

Scott

We've all known that these people have no clue about what they are doing for quite some time now. The problem with dropping it to zero is that, once they figure out that it doesn't work - they've got nowhere else to go. They should have left it at 1% and shown Wall Street that there is a limit on how far they will go. So far they have just kow-towed to whatever the Street expects so as to "not cause a panic in the market" Disgusting

December 17, 2008 at 2:54 am

Jack Frayer

Can you say Ponzi scheme? When numbers are real, all looks good. But now, the true problems of our financial system are showing. The ZERO percent interest is a confession that we are at the end of the Ponzi scheme. That is, all loans need to be reset to ZERO. Then, we can start the system again of raising interest rates as prosperity returns. The bad news for the banks is that it will take them many years to return to high profitability, when they are able to charge high interest rates again.

December 16, 2008 at 7:01 pm

Trumann

Fed can cut- but without jobs, or a manufacturing base ? who are they kidding ? Let's be sane here - why SHOULD the banks lend out... To who ? why ? What VALID business models are left ? US Manufacturing has been on the slide since the late 1970's. One missing piece in this puzzle is China's takeover on manufacturing ? China is falling apart too. Dropping rates - but China lived on exports. NO US consumers buying at china mart ? I mean - wal-mart ? China has to live on life support of southeast asia, and well ? Last I checked ? Every neighbor OF China wants to BE DOING what China is. So, here in the US ? no jobs, and no money to buy - but OUT THERE? JOBS - but no one to buy what's being made. China in my view IS the US auto industry. It's interesting they have not asked for help from IMF or WB. 2 trillion FAT cash on hand, sure, but you do the math how long does that LAST on a 1.6 BILLION population ? 1000 x billion = trillion NOT LONG. And at the end of the day ? the planet's known surface is coated in mercury - for what ? China's 600 ton a year mercury output costs ENDLESS child's neurophysiological health ? for what ? some cheap crap at wal-mart that LOOKED good until you used it and it broke on day two ? Count me out. We're ALL on the Trumann show. and we just don't know it.

December 16, 2008 at 5:32 pm

6ftrabbit

Old advise for current times: Business "HOW is business?" asks the young man of the Spirit of the Years; "Tell me of the modern output from the factories of fate, And what jobs are waiting for me, waiting for me and my peers. What's the outlook? What's the prospect? Are the wages small or great?" "Business growing, more men needed," says the Spirit of the Years, "Jobs are waiting for right workmen,--and I hope you are the men,-- Grand hard work and ample wages, work piled up in great arrears-- 'Don't see any job particular?' Listen, and I'll tell you then. "There are commonwealths to govern, there are senates to be swayed, There are new states still undreamed of to be founded, New empires in far oceans to be moulded--who's afraid?-- And a couple polar oceans to be sounded. Come on, ye jolly empire-builders, here is work for you to do, And we don't propose to get along without it. Here's the little job of building this old planet over new, And it's time to do the business. Get about it. "Get to work, ye world-repairers. Steel the age and guide the years, Shame the antique men with bigness of your own; Grow ye larger men than Plutarch's and the old long-whiskered seers; Show the world a million kings without a throne. 'What's your business?' Empire-building, founding hierarchies for the soul, Principalities and powers for the mind, Bringing ever-narrowing chaos under cosmical control, Building highways through its marsh-lands for mankind. "Sow the lonely plains with cities; thread the flowerless land with streams; Go to thinking thoughts unthought-of, following where your genius leads, Seeing visions, hearing voices, following stars, and dreaming dreams, And then bid your dreams and visions bloom and flower into deeds. 'What's your business?' Shaping eras, making epochs, building States, Wakening slumbering rebellions in the soul, Leading men and founding systems, grappling with the elder fates Till the younger fates shall greaten and assume the old control. "'Business rushing?' Fairly lively. There's a world to clean and sweep, Cluttered up with wars and armies; 'tis your work to brush 'em out; Bid the fierce clinch-fisted nations clasp their hands across the deep; Wipe the tired world of armies; 'tis a fair day's work no doubt. 'Business rushing?' Something doing. You've a contract on your hands To wipe out the world's distinctions,--country, color, caste, and birth,-- And to make one human family of a thousand alien lands, Nourishing a billion brothers with no foreigner on earth. "Have you learned yet," says the Zeitgeist, "the old secret of the soul? Make the sleepy sphinx give answer, for her riddle's long unguessed. Tell the riddle; clear the mystery; bid the midnight dark uproll; Let the thought with which the ages long have travailed be expressd. Go and find the Northwest Passage through the far seas of the mind,-- There, where man and God are mingled in the darkness, go and learn. Sail forth on that bournless ocean, shrouded, chartless, undefined: Pluck its mystery from that darkness; pluck its mystery and return. "'What's your business?' Finding out things that no other man could find,-- Things concealed by jealous Nature under locks, behind the bars; Building paved and guttered highways for the onward march of mind Through the spaces 'twixt the planets to the secrets of the stars. 'What's your business?' Think like Plato,--he did not exhaust all thought; Preach like Savonarola; rule like Alfred; do not shirk; Paint like Raphael and Titian; build like Angelo--why not? Sing like Shakespeare. 'How is business?' Rather lively. Get to work!" Sam Walter Foss

December 16, 2008 at 5:31 pm

Listening in Texas

So, next week, will the Fed be paying the banks to loan money when this doesn't work as they state? Japan tried this and it didn't help them much either by bringing their rates to zero. Why do we think it will work now?

December 16, 2008 at 5:27 pm

6ftrabbit

A "range" you say? They have obviously taken a page from the organic food folks. Free range chicken.

December 16, 2008 at 4:54 pm

about this blog

  • Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.

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