A Bloomberg story discusses that the Fed will have to lower rates further, despite January retail sales figures that came in better than expected, because lower short-term rates have not led to better terms for borrowers.
The story (and perhaps even the Fed) seems to miss why lenders are demanding higher rates: the securitization mechanism has broken down. Banks are looking at keeping loans on their balance sheets for a longer time, perhaps indefinitely. Bank intermediation is more costly than the “package and sell” model. And as bank and securities firms take writedowns and become capital constrained, they become more choosy about the risks they take and the returns they require.
Further rate cuts completely miss the point, and will create inflation without fixing the problem of high borrowing costs (in fact, for certain kinds of loans, like fixed rate mortgages, it will worsen terms directly by steepening the yield curve).
The Federal Reserve’s interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.
Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines….
“The problem is that every piece of news we’re getting continues to be bad,” said Stephen Cecchetti, a former New York Fed bank research director, and now a professor at Brandeis University in Waltham, Massachusetts. “They will have to ease more. It’s the only thing they can do.”….
Traders now see a 100 percent chance of at least a half- point reduction at or before the Federal Open Market Committee’s March 18 meeting, up from 68 percent on Jan. 31…
The extra yield investors demand to buy investment-grade U.S. corporate bonds rose to 2.37 percentage point Feb. 12 from 2.24 percentage point on Jan. 21, Merrill data show. For high- risk, high-yield securities, premiums over Treasury securities have risen a quarter-point, Merrill data show.
“The increase in credit spreads has sort of worked against our policy,” San Francisco Fed President Janet Yellen told reporters at her bank yesterday. “The fact that the spreads went up so dramatically really resulted in an effective tightening of financial conditions that our cuts were partly meant to address.”