LIBOR To the Rescue?

For the first time in recent memory - and perhaps not so recent memory - the dollar LIBOR Overnight rate closed below the Fed Funds target rate.   The three-month LIBOR (London interbank offered rate) for dollars declined 20 basis points to 4.06%, the most since Sep. 19, the day after the Federal Reserve Open Market Committee slashed the Fed Funds rate by 50 basis points.

That makes Hoofy happy, of course, but why?  Because many mortgages, for example, are tied to LIBOR. Also, the larger a positive spread between LIBOR and the Fed Funds rate, the more indication of stress in the credit markets.

So does this mean we are on the verge of another credit orgy?  Not quite.  LIBOR likely dropped hard on the expectation that Federal Reserve Chairman Ben "Boom Boom" Bernanke will ease by at least 50bps, on or before the January meeting.

This means that Boom Boom is getting painted further and further into the corner, because should he not oblige, the markets are likely to revolt, and we know he is a bit touchy about that.

Furthermore, should the rate cut come today, the LIBOR spread would re-adjust to about 30bps above Fed Funds.  That's not bad, but not great either, and it is certainly no guarantee that the rate cut will heal all that ails us.

And of course there are some of us who actually think that rate cuts will ultimately merely delay the inevitable, if not worsen the ultimate consequences.


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