Rate-Cut Limbo—How Low Can You Go?

The Federal Reserve on Wednesday surprised few with its half-point interest rate cut, sending the benchmark federal funds rate to a measly 1 percent, its lowest in five years. The business press is still divided this morning on how to interpret the aggressive cut—and on what's next. The Wall Street Journal likened the Fed cut to "a new assault on the global economic downturn," noting that central banks in China and Norway did their part, too, yesterday. The New York Times sees it differently, saying a "concerned" Fed has been recruited to redouble efforts "to contain the damage" of the global financial meltdown. And, lest you think the Fed has no bullets left, further cuts to a Bank of Japan-like zero percent interest rate is not beyond the realm of possibility. In fact, according to the NYT, the actual federal funds rate has been fluctuating well below 1 percent for weeks. In rationalizing yet further cuts, Barron's writes "the lower fed-funds rate won't do much to boost the economy," but it may succeed in lowering the crucial Libor interbank rate and free up the credit markets.

And the markets' reaction? A late-day sell-off on Wednesday poured cold water on the cuts as traders digested that tougher times lay ahead, CNNMoney reports. This morning, the Asian markets soared to another strong rally, BBC reports. Bourses in London, Paris, and Frankfurt nudged higher at the open, too.

It was a busy day all around for the Fed. After the rate-cut session, the central bank announced it was teaming up with the IMF to help capitalize teetering economies, pumping up to $120 billion into the central banks of Mexico, Brazil, Singapore, and South Korea. "The Fed has never lent on such a scale directly to developing nations, which are seen as having a greater risk of default," the Washington Post writes. Staying on the charity beat, the governors of New Jersey and New York yesterday headed to Washington, pleading with Congress for another stimulus package, "saying state governments would face devastating cutbacks if they did not receive assistance soon," the NYT reports. How much do the cash-strapped governors need? Hundreds of billions of dollars, the newspaper writes.

For homeowners facing foreclosure, there may be help for you as well. According to the Associated Press, the government is considering a plan that would help around 3 million distressed homeowners by earmarking "around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages." The plan involves modifying home mortgages so as to reduce crippling interest rates, the AP says, citing sources. A check for $50 billion is very little when you consider U.S. banks are set to receive $163 billion in government aid, more than half of which will be used to pay dividends to shareholders—not to finance loans as we were first informed, the Washington Post reports. While we're adding it up, where has the $123 billion lent by the Fed to AIG gone? The NYT wants to know this morning. Another puzzler, this one posed by the WSJ: How is it that the government takeover of Fannie Mae and Freddie Mac has failed to lower borrowing costs? Commercial mortgage rates continue to edge upward, even after the Federal Housing Finance Agency seized control of the lending agencies last month, the newspaper writes.

Northwest Airlines and Delta finally tied the knot yesterday, six months after the two troubled carriers struck a deal that "they argued would insulate the combined company from a surge in fuel costs," writes the FT. The upshot of yesterday's merger—hurried through just hours after the U.S. Justice Department said it wouldn't block the deal—is the creation of the "world's largest airline company by traffic," writes the WSJ. Is that a good thing? It certainly seems to have got Richard Branson's expansionist juices stirring. Today he appears one step closer to his dream of cementing Virgin Atlantic as one of the world's major airlines after a smaller rival that Branson wants to buy—British Midland Airlines (BMI)—sold a 50 percent controlling stake to Deutsche Lufthansa AG. That opens the doors for a potential three-way hookup of Virgin, Lufthansa, and BMI—"possibly under the Virgin brand name," writes the WSJ. While the airlines are consolidating and hoping for better times, so are the airports. The NYT reports that new runways and infrastructure projects are about to completed at airports throughout the United States. They could make congestion "a thing of the past," in the words of Northwest CEO Douglas M. Steenland. Of course, there's a catch. The cost for all this work will be passed on to you and me through higher fares, the paper says.

Forget the gloomy predictions of the Fed and all those analysts—perhaps we should take solace in the sale of lattes? Starbucks CEO Howard Schultz said his coffee company may be back on the up "as the chain is seeing signs that its business is improving," the WSJ reports. Starbucks has been hit hard by the economic downturn and is in the process of shutting hundreds of U.S. stores while revamping its product offering to win back customers. Though overall sales were down in the last quarter, Schultz said he'd seen a "slight improvement in the first few weeks" of the current quarter, "which might suggest that Starbucks has hit bottom."

And finally, what's the hottest ticket in town these days? Career fairs, according to the WSJ. "As Americans fall victim to layoffs and downsizing, they're flocking to career fairs, causing long lines and exhausting hiring managers whose booths are overflowing with candidates," the newspaper writes this morning. It may be good news for employment recruiters, but job seekers, once inside the door, are finding slim pickings. Prospective employers are scarce, leaving a lot of booths empty.