The Federal Reserve has been resistant to lowering the its bond interest rate on the ground that inflation is its first priority to cope with, and it claims the subprime mortage problem is still confined to credit market, despite investment market critics urges for lower interest rates in attempt to save the industry(most of which are investment banks getting involved in ABS, MBS, and particularly CDO).
How can low interest rate save the plagued credit crisis, most notably the CDO trade between investors and investment banks?
Any rational or professional analysis is welcomed.|||Much of the subprime mess relates to variable rate mortgages that lots of people are barely able to pay. If interest rates werre to go up, millions of these mortgages would adjust up and many more people could not afford the payments. Thus, foreclosures wold skyrocket (more than they have) causing more of a housing glut making this market even softer. So, the few really needs to keep interest rates as low as possible to avoid this problem as much as possible, but as you mentioned they also need to worry about inflation and may need to raise rates in fear of that. In short they walk a tight rope between the 2 fears (inflation and housing problems) as well as other fears and must set the rates taking these both into account.|||Try to read these 2 articles!
http://minute-class.com/?p=94
http://minute-class.com/?p=95
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