Monday, August 20, 2007

With All The Clamor For A Rate Cut -- Rates Aren't That High

There's been a lot of talk about the need for a rate cut by the Federal Reserve. However, it's important to note that interest rates aren't that high right now. Here are a few charts from the St. Louis Federal Reserve to Illustrate

The 10-Year Constantly Maturing Treasury

AAA Corporate Paper

BBB Paper

The Prime Rate

The Effective Fed Funds Rate

In addition, the short-term Treasury curve indicates that flooding the system with liquidity won't solve the problem. Just because someone has the money to lend from a liquidity injection does not mean they will use that money to make loans. Here's a chart of the short-term Treasury curve to illustrate that point.

The bottom line is this is a liquidity issue -- people don't want to make loans right now.