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…Today’s stock market is down around 10% over the past two weeks but where is the law that says the stock market isn’t allowed to fall? Capitalism is all about risk and reward. There are supposed to be periods of decline. To the Fed, however, a 10% correction…is so catastrophic…that they couldn’t even wait two more weeks for their regularly scheduled meeting. They had to take immediate action to prop up the stock market…@A Financial Site For Sore Eyes & Inquisitive Minds
Here’s why that matters:
- In the crash of 1987 when the Fed cut interest rates, its benchmark rate was 7.25%, so a half-percent cut was not especially significant.
- In 2000 when the U.S. economy entered recession (and the stock market started to fall from its peak), the Fed’s benchmark rate was 6.5% so they had plenty of room to cut rates.
- In 2007 when the U.S. economy entered recession yet again (and the stock market started to fall from its peak), the Fed’s benchmark rate was 5.25% – still plenty of room to cut rates.
- As of yesterday morning, the Fed’s benchmark interest was just 1.75% so a 0.5% cut is pretty huge. Do the math – they cut interest rates by nearly a third, down to 1.25%. This gives them VERY little room to cut rates further when the U.S. economy enters recession, virtually guaranteeing that interest rates in the Land of the Free will go negative.
In a typical recession, the Fed cuts interest rates by an average of 5% [but with] rates now only 1.25%…we could easily see rates at MINUS 3 to 4%.
Just imagine paying money to deposit your savings at the bank…or being paid to borrow money…That is now a very likely possibility in the most advanced economy in the world.
I probably don’t have to tell you this, but negative interest rates will almost certainly be very positive for gold prices, and gold-related investments. More on that soon… because this emotional roller coaster is far from over.
Editor’s Note: The original article by Simon Black has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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We can’t rule out the possibility that, at some point in the next few years, our economy will slow, perhaps significantly. How would the Federal Reserve respond? What tools remain in the monetary toolbox? In this and a subsequent post, I discuss some policy options the Fed might consider, focusing first on negative interest rates.
There’s a view in some policy circles that easy monetary policy is good for an economy, and the more stimulus you add, the better…This latest stimulus is taking the form of negative interest rates, or charging banks to park their cash with the expectation that this will spur lending and economic growth…In my opinion, however, negative rates—or high rental costs for money storage—are excessive and more likely to hurt, rather than help, economic and financial stability. Here are a few reasons why:
Investors have watched bond yields in Europe and Japan slide below zero into negative territory, and some have wondered: Could it happen here? Although you can never say never when it comes to markets, I believe the odds are slim, for reasons discussed below.
What is driving the gold price higher and how may market fundamentals influence its price in the future?