Tuesday 18 March 2008

"Fed cuts rates by 75 basis points"

This is all rather chortlesome, really.

It has always been the case that changes in the very short term rate paid on loans between central banks and commercial banks have had little effect on long term rates. Indeed, increases in the short term rate sometimes lead to a reduction in long term rates, because a higher short term rate chokes off inflation and thus makes long-term bonds a better investment (and vice versa). In today's markets, there is not even any correlation between the Fed funds rate (or BoE base rate) and variable rates charged on mortgages. See for example a couple of Thursdays ago, when the BoE left rates unchanged and some UK banks celebrated by increasing mortgage rates by 0.3%.

The problem, as ably outlined in today's FT, is that nobody trusts anybody any more.

So this is not so much throwing caution to the wind as flushing it down the toilet.

2 comments:

Anonymous said...

In recent years, wankers have succumbed to the idea that the world's climate was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood.

Mark Wadsworth said...

Yup. And hopefully people will lose faith in them as well.