Global Credit Crisis and Interest Rates
August 10, 2007
Federal fund future prices are suggesting the Federal Reserve will be forced to do an emergency rate cut within the next week in advance of the September meeting according some market analysts. Fed Funds futures appear to have priced in a substantial likelihood that the Fed may make the move after a series of recent global credit market debacles including major hedge funds in the United State and France. Central banks in Europe have injected over $100 billion into banks to provide liquidity to their banking systems. While short term rates in the United State appear to be headed lower, in Europe the various LIBOR rates have skyrocketed this week which will cause any loan rates tied to the LIBOR rate to be significantly higher. Just to complicate matters for the Federal Reserve July import prices came in today higher than expected and made the largest gain since March. The Fed, which just this week, renewed its commitment to controlling price inflation, now must walk the tightrope between being the lender of last resort to help save the credit markets, while also remaining the self-proclaimed inflation watchdog. It looks like something has to give here....
