The economic importance of long term interest rates going from almost 16% to 1.8% cannot be overemphasized. If that interest rate belongs to what the world regards as the Reserve/Reference Currency the impact is even bigger. In a sense, every project around the world is ultimately, through the foreign exchange market, measured against that interest rate; which is why the Federal Reserve has been able to attain the god-like status that has enjoyed until today? last week? 2008?
These people have had, until recently, the ability to entice others to borrow, consume, invest, speculate, plan, etc. by manipulating interest rates. Any time there has been a problem (1987 crash, 1992 recession, 1994 Mexican crisis, 1997 Asian crisis, 1998 Russian/LTCM crisis, 2000, dotcom crisis, etc) the Federal Reserve has been called to the rescue with the expectation that they could fix things, if they wanted, and why would they ever choose not to fix things.
More recently the Fed announced another policy designed to lower interest rates even more. Rates are indeed lower this time. However, we think this policy will have the same effect on the economy as their recent predecessors. Why? Because, at close to zero, the price for credit is NOT the problem. Anybody in the US with good credit and collateral can borrow very cheaply. The problem is that most of these people are not interested in borrowing anymore. In turn, companies, as we hear every day, are flush with cash which is another way of saying they cannot find good investments.
So Bernanke may launch Q3 and indeed Q20, each with its own unintended future consequences, without encouraging new consumption or investment. Sadly, some said that "to a man with a hammer as his only tool everything looks like a nail."
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