FED lowers fed funds rate again– what about the ECB and the BOE?

Do a search on the Wall Street Journal website, www.wsj.com for ‘fed funds rate’ and you’ll get articles about the hoped for effect of lowering the short term cost of borrowing by US banks, AND you’ll get articles about what is happening in Europe and the response of the European Cental Bank equivalent of the FED. My reading of the daily business news has been that the ECB claims to be more concerned about inflation than recession and so claims that it will be holding the overnight interest rate for European Banks at a high level in order to combat inflation, but inevitably 30-60 days later an article comes out suggesting that the European economy is influenced by the US economy and so as the FED has been lowering the Fed Funds rate, the ECB will lower the Euro interbank offered rate and the BOE, Bank of England will further lower the Libor.

Here is what Joellen Perry wrote in her article,  http://online.wsj.com/article/SB120601229992551599.html

“The ECB has been holding rates steady at 4% while the U.S. Federal Reserve has been reducing them. Many analysts argue that factors including a U.S. recession and the surging euro mean growth this year will slow more sharply than the central bank’s projection. They anticipate the ECB will start cutting its key rate in June.”

Here is what Carrick Mollencamp and Mark Gongloff wrote in their 2/7/2008 article about the Bank of England making decisions about the Libor. http://online.wsj.com/article/SB120234389156849037.html

“Some investors are already starting to look beyond the rising odds of a recession. In the fed-funds futures market, where investors make bets on the outlook for Fed policy, investors are betting the Fed will be done cutting interest rates this summer.

The euro, meanwhile, has been under pressure because investors increasingly think the European Central Bank is behind the curve in addressing economic weakness in the euro zone. The ECB will likely keep rates on hold at its policy meeting today, but policy makers could hint that they’re turning their attention from fighting inflation to fighting recession, which would hit the euro. The Bank of England is expected to cut its key interest rate, which could also support the dollar against the pound.”

So that is why you will see the ECB’s 30 day Euro interbank offered rate at 4.35% and the Bank of England’s Libor at 2.606% as of March  21, 2008. With the Fed Funds rate currently at 2.25%  and a lot of discussion about inflation vs recession, there is going to be a lot of attention paid to taking supplemental steps to support the economy, not just lowering short term interest rates. The respective governments are going to be taking other steps to bolster confidence in their economies, such as engineering “supports” (aka “bailout”) for failing banks (nationalizing Northern Rock in England, lending money to German lender IKB  to cover writeoffs) or investment banking houses (helping Bear Sterns in the US).

There has been discussion that in the early 2000’s the FED took the Fed Funds rate too far down to 1% and left it down for too long. So if you are waiting for the magical 1% Fed Funds rate mark to somehow revitalize confidence in the economy and cause long term mortgage rates to drop, you’ll probably be waiting a long time. The 1 month Libor may get down to 2.25%, and it’ll probably stay there for awhile, but don’t hold your breath for it to go down further. So if you are looking to refinance a variable rate loan during 2008 or 2009 the next three to six months would be a good time to do it.