Friday, November 07, 2008

CMHC comments that rates aren’t the only game in town!

Rates aren't the only game in town!

These are the comments by CMHC about interest rate cuts in the future

A key question is whether or not the Fed will continue along the course of lowering interest rates to limit the depth and duration of the recession. Last week's move to 1% and the accompanying statement did not preclude more rate cuts. However, the sustained decline in the three-month LIBOR rate in the past two weeks suggests that the seized-up funding markets are starting to thaw in response to efforts to provide liquidity directly.

While this is encouraging, until there is evidence that financial institutions are willing and able to make loans to businesses and households, downside risks to the economy will remain as will the odds that the Fed will cut again.

Aside from additional interest rate cuts, we expect the Fed will continue to increase the scope and size of its current liquidity operations and to encourage rates to remain low across the yield curve, spreads to narrow and, ultimately, firms to lend. A move in the Fed funds rate below 1% could have some unintended and disruptive consequences for money markets and that cost will have to be balanced against the benefit of additional rate stimulus.

In the meantime, the Fed should concentrate on other policies, which could include a public commitment to a low rate policy stance for a protracted period as a means to keep term rates low or more systematic, outright purchases of long-term bonds or other securities to supplement the Treasury's efforts in recapitalizing financial institutions.

They are also likely to continue to concentrate on addressing specific market imbalances through programs like the commercial paper lending facility, which got under way last week. Signs that credit stresses are easing will give policymakers more leeway to keep the funds rate at its current accommodative level and use more proactive policies.



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