The Web Tycoon's blog » Interest rate

The Federal reserve is cheapening the recovery with low interest rates

The-Web-Tycoon — Wed, 07 Jul 2010 02:43:10 +0000

Earning money too easily has its own risks. First fed the real-state bubble, now, despite what we could think, could be cheapening the economic recovery.

When reducing the interest rates to almost 0, the Federal Reserve helped to prevent an economic collapse. However, in front of a weak recovery, many thing than the Federal Reserve is creating deflation.

The question of the million is why banks aren’t spreading credit, specially to small companies who are the motors of economy. One of the answers is that there isn’t demand of credit, but the lack of supply has his role too.

Ronald McKinnon, a teacher of economics in the University of Stanford, says that interest rates near to 0 brake the inter-bank market, what affects the growth of credit. According McKinnon, big banks doesn’t lend to small ones because the profit they might take is ridiculously small.

According data from the Federal Reserve, the amount of pending inter bank credits at the end of May was around $160 Bn, what supposes a fall by 60% in a year.

At the same time, banks are reducing credit and accumulating funds. According showed data from the Federal Reserve, its amount of Treasury Bonds and governmental debt increased by 19% respect the previous year. Industrial and commercial loans fell by 18%.

Small and medium companies have been the most affected. In the first quarter, the pending debt of small and medium companies fell by $70Bn, according data from the Federal Reserve, while big companies have seen his debt increased by $100Bn.

The negative to give credit is understandable. Banks can obtain cheap money to invest in high profitable governmental debt, a phenomenon called carry-trade.

This contrasts with consequences that interest rates nearly 0 have on investors, that had to move to risky assets in order to obtain something for his money.

Making money more expensive, would damage the economy, because some companies and individuals paid more for the float rate of his debt. But it could compensate banks to increase loans in inter-bank market. Profits from carry-trade investments would be reduced and banks may try take higher performances with traditional loans.

In this case, “increasing interest rates could have an inflationist effect” Comented Jopseph Mason, Finance professor inn the University of Louisiana.

The Federal reserve is who has to decide whether take odd measures or continue with a so aggressive monetary policy.

The Federal Reserve is optimistic about the economy but will keep interest rates steady

The-Web-Tycoon — Thu, 29 Apr 2010 02:36:16 +0000

The Federal Reserve repeated the same speech from last months when keeping interest rates in a historical minimum, between the 0% and the 0.25%, and return to show that is willing to keep it during a “period of time”. The Federal Reserve also noted that in the last month the economy has been getting stronger.

The Federal Reserve hasn’t changed any coma of his habitual speech, at the end of the meeting began yesterday, the Federal reserve decided to keep the price of money steady in his historical minimum one more month. Since December of 2008, the interest rates of the United States remained between 0% and 0.25%.

Furthermore, the Federal Reserve reiterated that interest rates will remain in a low level “during a period of time”, repeating the same words that some are voices are demanding to be suppressed from communicates. However, the members of the open committee of the Federal Reserve are defending that the forecasts point that these measures are necessary to help promote the economic and labor recovery, so as price stabilization.

About the economic Landscape, Bernanke and his team highlighted that continued recovering and pointed that he labor market is beginning to give live signals, when improving respect his last meeting. However, the Federal Reserve reiterated that the recovery will be “provably moderate for a time”, but hopes a gradual improvement of the usage of economic resources.

The interest rate of Greek debt reached 8.28%

The-Web-Tycoon — Thu, 22 Apr 2010 01:44:29 +0000

The beginning of the meetings with the European Union and the international monetary fund, didn’t prevent a new record on the price of defaulting insurances of Greek debt. The fears are getting bigger until the point of boosting the interest rate of the 10 years Greek debt to 8.28%, with 500 basic points of difference from Germany. Spain also increased the interest rate of hist debt to 80 basic points.

Investors of public debt are fairly opting to reduce its risk profile. The German debt becomes winner in a tendency that affect the surrounding markets.

credit default swaps (CDS) to 5 years of Greek debt also reached a new maximum of 489 basic points, what means that the cost of insurance $10milion grows to $489,000.

Not just the Greek debt is in trouble

The Greek debt isn’t the only in trouble, the defaulting insurances got also more expensive for other surrounding countries. In the case of Portugal , the CDS to 5 years increased to 219 basic points, from the previous 200, while in the case of Spain increased from 144.8 basic points to 152.2.

The record alerts on the financial health of Greece coincided with th beginning of the meetings on the Greek debt with the European Union and the International Monetary Fund, after two days of delay caused by the aerial collapse.

The market considers the option of prolongation of the meetings for about 2 weeks, and according the analysts, and they are thinking in giving 45,000 millions of Euros in aids and save the Greek debt. The Greek governments asked for help before the end of “official” conversations.

The Junk bonds have it’s best behavior of all the century

The-Web-Tycoon — Tue, 20 Apr 2010 03:10:30 +0000

There Junk bonds succeeded in the beginning of the 80’s in the market of the United States thanks to Michael Milken, who inspired a character in a film by Gordon Gekko, the mad in the film of Wall Street.

These Junk bonds are in his best rally since 1996, after having positive profitavilities during 14 consecutive months, due to the growing hunger from investors to the risk in the middle of an scenario of low interest rates. In the year, they won a 4.74% according the index Bank of America Merrill Lynch US High Yield Master II.

The Junk bonds had one of the bests behaviors in the industry. The category grew by an average of

47,29% I the lest 12 months, by 6,9% during the first quarter of 2010 and by 3,01% in March, according figures from Interactive Data.

Among the Junk bonds, we can highlight the products from Aberdeen, UBS Global Asset Management and BNP Paribas, with profits of 163%, 80,57% y 79,06% respectively. “A year ago,people thought that it was the end of the world. However the doubts on defaulting of many companies became brighter”. Explained Andrés Francoy, responsible of Fixed-income securities in the unity of big assets in Deutsche Bank.

Credit rating of the Junk bonds.

These assets are called junk bonds for his high level of risk and because they dispose of a very low credit rating, what points a high possibility that a company couldn’t be able of afford his financial compromises. For that reason, when a firm with a credit rating lower than BBB- , according Standard & Poor’s and Fitch or Baa3, according Moody’s, wants to issue debt, investors want astronomical profitavilities to purchase these titles.

Low interest rates are braking the Dollar and the Yen

The-Web-Tycoon — Fri, 19 Mar 2010 18:48:14 +0000

Both the Federal Reserve and the Bank of Japan have decided to postpone a increase of interest rates. The answer in the currency market is a brake for the dollar and the Yen, and a higher increase for the most punished currency last months: the pound.

The activity began past Wednesday when the meeting of the Federal Reserve ended. The Federal reserve did not change his speech, and although the weak signals of recovery, is still likely to keep interest rates between 0% and 0.25% during a long period of time.

The other central bank, among the biggest economies in the world, that has gone further with his policy of 0 interest rates, the one of Japan. Isn’t likely to keep this policy too. After his last meeting decided to double his liquidity program for the financial system to surpass $220.000 million.

The cross among the Yen and the Dollar remained steady yesterday, with a growth by 0.06% of the Japanese currency. At the same time, the dollar is paying the fears of inflation. The data about production prices in February was released yesterday with a growth by -0.6%. The analyst’s forecasts estimated this by no more than -0.2%.

The Euro hasn’t been able to take a fair advantage from the situation of the Dollar. The currency has just been able to keep the gains obtained after the aids promised to Greece, and now an Euro has a value of 1.38 Dollars.

The pound is the luckiest currency this week, investors ended to speculate low thanks to the lowest demand of unemployment subsides in the United Kingdom since 1997. The hope of recovery on British Economy o pushes the pound by 0.52% to 1.532 dollars per pound.

The Federal Reserve Increased the Discount Interest Rate

The-Web-Tycoon — Sat, 20 Feb 2010 03:01:42 +0000

The Chief economist from the Bank of America in New York, Mickey Levy, believes that the decision adopted by the Federal Reserve two days ago, when increasing the discount interest rate, shows that “the financial crisis ended, in great part”.

In declarations took by Bloomberg, Levy estimates that “it is time to normalize things”, after the Federal Reserve began to trim the interest rates when lending money to the banks in the beginning of the financial crisis at the end of 2007. The economist points that this movement “doesn’t represent too much, because any bank in a situation without crisis will go to the discount office if doesn’t have problems”.

On Thursday, the Federal Reserve increased for first time since June 2006 the discount interest rates given to the banks with need of liquidity to obtain short therm financement by an increase of 0.25% to the rate of 0.75%.

The Federal Reserve will go further

“The Federal Reserve, during the financial crisis, lowered the discount interest rates to increase the liquidity in the system”, highlights Levy. The expert points that “now we must retreat the aids to obtain liquidity, given that we aren’t in the financial crisis”. For that reason, Levy points that “It’s normal the movement to the normality in the difference among the general interest rate and the discount interest rate”.

Levy assured that central banks will increase the federal interest rates “when they be convinced of that the economic recovery is sustainable”. Since December 2008, the interest ratel is in his

lowest level in all the History, among a 0% and a 0.25%

The Interest Rate in Europe may be kept low because of the Dubai Crisis

The-Web-Tycoon — Wed, 02 Dec 2009 23:01:54 +0000

The members of the ECB’s Observatori, a committee of experts, believe that its necessary to keep the interest rate at 1% and will say it in the meeting that will be hold tomorrow.

However, there isn’t consensus on the way the emergency measures taken because of the crisis should be lifted, the committee believes that the support given to the banks should be gradually retreated.

The recent Crisis of Dubai, Whose government asked for a moratorium to pay part of the public company , Dubai World, triggered the divergence of opinions. ”the panic generated by Dubai is the best test to reach a conclusion about the financial crisis, this case mirrors a trust crisis that is far of being solved”

Explains José Luis Martinez, strategist in Spain of Citi ”’the Central Banks must continue spreading liquidity and adecuated credit conditions to normalizethe markets”,

added. Nowadays banks can get money at a low interest rate an lend it very expensive.

Jean Claude Trichet, president of the ECB will give details from the meeting of tomorrow about the quit strategy of the crisis, that will presumably include rises on the interest rate. Will also define the conditions of the next liquidity of one year auction, that will provably be the last.

The liquidity auctions are able to set the interest rate because people lends money according the cost they have to obtain new liquidity.For more information about how does this Machine grow, see The Interest Rate

Bernanke said that the Federal Reserve will not raise the interest rates

The-Web-Tycoon — Tue, 24 Nov 2009 19:00:28 +0000

Ben Bernanke, has stated that the federal Reserve follows very closely the evolution of the dollar, after the considerable depreciation this currency suffered in the last weeks against other currencies. However, Bernanke, highlighted that the interest rates will continue low as the economy continues weak and the employment high. Ben Bernanke participated in a talk at the Economic Club of New York, where repeated the same speech about what will do the Federal reserve in the following months.

The president of the Federal Reserve, reiterated that although the economy has returned to the growth, ” the interest rates will continue low during a long period of time”.

In spit of the return to the positive data of the US GDP, the Unemployment is continuing to rise unstoppable, because the economic growth isn’t intense enough to create new jobs. Ben Bernanke remarked that there is still a problem with credit that ”together with the growing unemployment and a weak economy, will postpone the economic recovery”

Ben Bernanke is seeing big challenges for the incoming year, but signaled that ” some notable changes in the economic conditions, will turn the landscape of the monetary policy”. For the next year, Ben Bernanke sees ”a moderate growth, that will not be enough to reduce unemployment”, The current policy of the Federal reserve will be kept during some further months.

”We are watching the dollar from very close”

at the Same time, Ben Bernanke recognized that is worried with the dollar , He also stated that the Federal Reserve is following the value changes of the dollar and will design a policy to ”avoid risks” with the objective of promote employment and stability in prices”.

Ben Bernanke considers that the devaluation of the dollar as a mirror of the increase in prices of raw materials due to the improvement of the global economy.

The European Interest rate is likely to continue low in 2010

The-Web-Tycoon — Thu, 19 Nov 2009 04:46:19 +0000

The interest rate in Europe is not likely to rise, October has been the month of the 5th negative strike of the inflation rate in the European Union. However, this time,it was just by -0.1%, due to a increase by 0,25 in the interbank market, The Euribor set this historical minimum at 1,222%.

According the analyst’s forecasts, the prizes in the Eurozone, could recover his positive values this month itself, and make the interest rates end to fall, according the analyst’s forecasts. They also predicted a monthly growth of 0,3% in October, but this became just 0.2%.

The Inflation rate in the Eurozone is keeping too far from the limit objective ( point where the interest rate should be increased) of 2% set by the European Central Bank (ECB). The analysts forecasts continue postponing the increase of interest rates in the Eurozone until the 2010.

Without perspectives of change on the short therm ratings, the interbank market, the interest rate of Europe, the Euribor was set still lower than before, 1.222%, under the previous record last Friday of 1.224%.
The monthly average of the Interest rate, was also set to in the zone of the historical minimums, the1.231%, lower than the 1,243 in October.

The Recession is Still Threathening Us, The DOW Falls.

The-Web-Tycoon — Thu, 01 Oct 2009 00:40:18 +0000

This week we are seeing the shadow of a new recession. Although the GDP growth in the US is being higher than the expected, today, the Dow had a day in red and felt by 0.31% to 9712 points. But there Isn’t motive to alarm, this week we had many macroeconomic news.

We must be optimistic, according to the Inflation record in the European Union of the 16 , the Eurozone inflation felt more than expected by a 0.3 per cent year on year in September. This means that the ECB will not have to raise interests in order to contain the inflation, and the European economy will continue be boosted at least the whole 2010.

In despite of these good news, there are some black clouds in the skyline. The PMI of Chicago has been unexpectedly low this month, 46.1 points versus the 50 points of August. This means that central United States are destroying economic activity, and if we sum that this month the market lost 254.000 jobs instead of the expected 210.000, it’s not difficult to understand why many people is opting for sell their risky assets.

The financial system under review.

The International Monetary Fund IMF, warned of the danger of a new recession, banks are living in a happy hour, they can lend money with a very low price of the resources while charging a high interest rate. Credit restrictions are dangerously contracting consumption, and their excuse is that we are in danger of a collapse. The issue here is to fairly evaluate the loses of the Financial crisis, otherwise:

”A failure to reveal the true scale of the losses they are likely to face and boost capital held in the banks would undermine the economies of the US, the UK and the Eurozone and could generate a renewed vicious spiral where weak banks damage economic prospects, raising default rates and further threatening the health of banks”, the IMF said.