Fed cuts rate to virtually zero

The Feds cut the federal funds rate from 1.0 percent to a range of zero to 0.25 percent. In addition to that, they continue to apply “quantitative easing” which “effectively means printing money”. The effect of money printing is already being felt with the US dollar easing against other currencies.

The rate cutting measure seems to be getting some traction as the mortgage rate in the US hits 37-year low, spurring mortgage refinancing in the US. Meanwhile, economists said Asian central banks have room for more interest rate cuts, “a trend that will continue into 2009″. Mortgagers can probably expect lower rates to come.

SOR moved higher this week to 1.4%, seemingly against the flow whereby the cost of borrowing in USD is supposedly coming down. Sibor holds still at 0.94%. We can reasonably assume that the Feds will keep their taps open until people start buying houses, so rates should remain low for some time. But there is also danger to watch out for in the form of the Treasury market bubble. Investors have been buying Treasuries “to ride out the storm”, driving US Treasury yields to near zero. Should there be a bursting of a bubble, there would be a rush out of Treasuries, and there could be a “huge switch in interest rates very quickly”.

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