Yesterday the Federal Reserve dropped the Federal fund rate 0.75 percent to 2.25 percent. This was less than the 1 percent people were hoping for. The stock market did not seem to mind, rallying 420.41 points to close at 12392.66. The WSJ notes that the futures market is expecting additional cuts which would bring the Federal Fund rate down to 1.50% to 1.75%.
Since the beginning of this latest round of rates cuts, the rate has dropped from 5.00% to 2.25%. Below is a nice little graphic from the WSJ.com showing the drop in the Federal funds rate & the Discount rate.
Source: WSJ.com
Below is another chart comparing this round of rate drops to other recent easing cycles. The Fed has cut rates quickly dropping 3% points in 120 days. In 2001, the last time the rates dropped this much, it took over 160 days.
Source: WSJ.com
These rate drops are great if you are looking to take out a loan or have a variable rate loan, not to good if you have large amounts of cash sitting in a bank account. Bankrate.com has a series of articles noting the winners and losers of the latest interest rate cuts. They reiterated my point that new borrowers or those with variable rates are the winner and those with cash are losers.
They quote William Larkin, a fixed income portfolio manager at Cabot Money Management in Salem, Mass: "The Federal Reserve has clearly signaled that they're going to throw savers under the bus."
Below is a chart from Bankrate.com showing the drop in national CD and MMA rates over the three months. Not too encouraging for savers.
With interest rates so low, where do you put your money to work? One place is the stock market. Before yesterday the stock market was approaching the 20% decline that people consider as a bear market. To paraphrase Baron Rothschild the best time to buy is when there is blood in the streets. Below is a chart of the S&P 500 over the past three months.
It seems that this post has a nasty habit of inserting graphs that are all going in the downward direction.
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