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Market Dive: Why a Rate Cut Won't Help

Cheap money helped get us into this mess.
 
 
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Well, my comment below (where I said the Fed should have said "We are now Wall Street's bitch) pretty much summed up where I come in on the issue of the rate cut.

However, there are some other very important reasons why I think this is a bone-headed move.

Interest rates aren't that high right now.

To listen to the rate cutting crowd, you would think that interest rates were at godawful levels that prevented lending. Nothing could be further from the truth.

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Above is a chart of the effective Fed funds rate. I eyeballed a line from current rates back through the history of previous rates. Notice today's rates aren't that high, especially in a historical context. In other words, money isn't that expensive right now.

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Above is a chart of th constantly maturing 10-year Treasury. Note that rates have been declining for nearly 20 years.

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Above is a chart of AAA corporate paper. Notice the highest rates have been during this expansion corresponds to the low point of the previous cycle. Simply eyeballing the chart, it looks like AAA corporate paper is about 5.25%. That's not expensive at all.

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The same analysis goes for BBB paper -- it's just not that expensive to borrow right now, even for a riskier corporate credit.

So -- interest rates just aren't that high right now.

Inflation is on the horizon

Hale "Bonddad" Stewart is a former bond broker with several regional firms. He has been involved with the financial markets since 1995. He currently practices law in Houston, Texas. Stewart is the proprietor of the Bonddad Blog .

 
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