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Interest Rate

Economic Overview

by Geoge Dickson
January 25, 2008

The ideal of having a collegial transparent Fed where all FOMC members have an independent voice, even proudly dissenting as William Poole did with the emergency 75 basis point cut last week, is not being well received by the market. However, by letting the credit markets twist in the wind for as long as he did, Bernanke sent the market a valuable message about appropriately pricing credit risk, a message Greenspan would never have had the courage to deliver. Further, Libor credit spreads have now normalized, perhaps because many credit excesses have been wrung out of the market over the last few months.

Chairman Bernanke waited as long as possible for the recent ease so that Libor might move down lock- step with the Fed's cut, so as to have the intended broad economic effect. Otherwise, the emergency ease would have only had the effect of "pushing on a string" if Libor did not decline in tandem. Three-month Libor is now inverted -25bps to federal funds at 3.25%, versus +30 bps historically and +75bps at the end of '07. Bernanke's actions deserve the benefit of the doubt until the outcome of this recent global economic downdraft fully unfolds

Interest Rates Chart