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Tuesday, December 02, 2008

Rates Heading To Zero

Ben Bernanke, the Chairman of the Federal Reserve, gave a clear signal to the markets that rates are moving towards 0%.

Mr Bernanke is quoted in The Times:

"Although conventional interest-rate policy is constrained by the fact that nominal rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver, the provision of liquidity remains effective.

Secondly, the Federal Reserve can backstop liquidity not only to financial institutions but also directly to financial markets, as we have recently done for the commercial paper market

That is a very clear assurance to markets that rates will fall to zero, and that other tools over and above rates will also be used.

The pressure is now on the dithering and laggardly Bank of England to wake up and cut rates further, as they should have done much earlier in this recession. The MPC will meet this week, and are expected to announce a further cut in rates of 1% to 2%.

Behind the curve as usual!

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