Interest Rates Review - October 5, 2007

Interest rates had a mixed weeks with mortgage rates decreasing, bank deposit rates decreasing, and The 50 point interest rate cut by the Federal Reserve may be enough to keep the U.S. economy from sinking as a result of the financial markets’ recent turmoil, Donald Kohn, vice chairman of the central bank, said Friday. Kohn went on to say

“But pending further evidence, a 50-basis-point easing was not an unreasonable first approximation of what might be required to keep the economy on a sustainable growth path,”

Kohn’s comments echoed a growing consensus among economists that the Fed rate cut had more to do with easing troubled credit markets and revamping a sluggish economy. Kohn and other Fed officials have hinted that the 50-point rate cut may be the necessary spark to calm the credit markets and that the main objective of the Fed may revert back to inflation-watching.

The economy has already added more jobs than expected in August and other economic reports have suggested an economy healthy than forecast three weeks ago. U.S. Treasury yields on the 5-year, 10-year, and 30-year bonds have increased this week and increased the spread between the yield on short-term and long-term Treasuries. The larger this spread (usually measured by the spread between the 90-day T-Bill and 10-year T-Bond) the more likely inflation is expected in the economy. Bank deposit rates which have slowly adjusted to the Fed cut in September are not likely to increase quickly. Most banks have lowered deposit rates on deposits to below 5.00% and until the yields on Treasury Bills, Treasury Notes and Treasury Bonds show resiliency at these higher levels (or the Fed increases rates) - they are expected to stay at 5.00% or lower.