Fed Funds Rate stays at 2%

With the collapse of Lehman Brothers, many were wondering if the Feds will cut their target rates to help keep credit flowing. The FOMC decided to keep rates at 2%. However, the Fed’s statement is interpreted as a “signal it will consider a reduction in the future by acknowledging in its statement that strains in financial markets are increasing.” For a moment predictions showed a marked increase in the probability of the Fed Funds Rate falling to 1.75% but the probability fell immediately after the Feds Funds Rate were held steady.

While the Fed Funds Rate remained at 2%, actual loan rates may be a different story as “the cost of money has risen sharply above the Fed’s 2% target.” Banks have increasingly tightened credit since the sub-prime woes. Local interest rates in Singapore have been more or less stagnant for the past month or so. If it continues to have strong correlation to the Fed Funds Rate then the rates should continue to hover at current levels. However, given the drastic changes in the financial system in the US and its repercussions to the rest of the world, nobody can say for sure what will happen tomorrow. It may well turn out to be a complete meltdown, or hyperinflation or just a recession. Even as i am writing this, gold has just shot up 60 dollars, proving itself indeed to be the ultimate store of value.

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