Re: Fed Reduces the Fed Funds Rate, What\'s Next?
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At the extremes, what would happen to the economy if the Fed took the rates to 1% or too high, say 10%? Assume these rates happen within one Fed meeting, for example, if today, the Fed cut rates to 1% from 4.75% or moved them to 10%.
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the yield curve & stocks would be the first to react imo and they'd do so with vengence. it woudl itnroduce a ton of volatility in the short term and cause huge dislocations (more than already)
if they kept them that way and signalled it (i.e. did that huge move and then said "we're gunna stay at this for XYZ reasons" then in the cut case the long yields would probably push up a ton with a very steep yield curve while short rates came in obviously.
tips would rally and everybody piled in (not a ton of liquidity there so prices would really have to jump and yields fall) as expectations of future inflation came in (int he case of a cut). similarly, gold would rally & the dollar would clearly sellt he hell offa nd that might cause huge problems for CA financing which would likely cause apositively reinforced spiral of needing higher long rates to hold dollars and the lack of demand to hold them.
it would really cause some huge moves.
Barron
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