Got Your Attention Yet?
Posted by Doug Rice on Fri, Jan 09, 2009 @ 08:40 AM
The FT reported that the Bank of England cut it's official interest rate to a
315 year low of 1.5%. In December, the US Fed cut it's target interest rate to historic lows between zero and 25 bps and the discount rate will drop to 50 bps, a level not seen since the 1940's.
As if it wasn't already obvious that the situation was historic, these moves provide ample evidence that we have never seen anything like this and are unlikely to see it again in our lifetimes.
Apparently, historic problems call for historic solutions.
What can we learn from this?
Psychology is an integral and crucial part of markets. The impact of an extra 25 bps is negligible, basically worthless. They didn't drop rates to historic lows by accident. They did it to make a statement, hopefully a bold one. If that extra 25 bps gets a headline because it's historic, the psychological impact can be very helpful by showing that they are doing major and significant things to turn the economic situation around, not just empty gestures like a $600 tax rebate check.
In doing this, the goal is for everyone to take notice that the Central Banks are on this and staying on this until things improve.
Will it work? The answer to that is highly related to we all answer this question:
Got your attention yet?