The Federal Reserve Board of Governers today announced that the key Fed Funds Rate would be dropped to 4.50%, the second rate cut since the beginning of the summer.
Critics are claiming that the Fed is throwing caution to the wind when it comes to inflation and a possible recession, instead favoring the ailing financial services sector. It remains to be seen, however, whether this rate cut will stabilize the financial services sector, which has written down tens of billions in recent months due to risky sub-prime lending practices.
It’s likely that this rate cut will slow down, rather than alleviate, the trouble banks are encountering. Some of the major players, including Lehman Brothers, have not yet reported on August and September’s weaknesses.
Recent volatility in the market suggests that there is no end in sight, as no one really knows how much of the asset-backed commercial paper out there is worthless. Further, derivative instruments such as CDOs and SIVs complicate the issue by spreading the damage done by loose lending.