Wednesday, December 17, 2008

US Fed adopts Islamic banking: zero interest

Wall Street Journal:
The Federal Reserve cut its target interest rate Tuesday to historic lows between zero and a quarter percentage point and said it could expand a program of unorthodox lending and securities purchases.
A number of official borrowing rates -- such as rates on three-month Treasury bills -- have tumbled to near zero, a level they haven't been near since the Great Depression.
The trouble for Fed officials is that while official borrowing rates are very low, interest rates for borrowers with even a modicum of risk remain far above levels of a few months ago, which is squeezing the economy.
One closely followed spread is the difference between interbank lending rates over three months and the expected federal funds rate. A growing spread indicates a higher cost of borrowing. That spread has come down from more than three percentage points in early October to about 1.5 percentage points, but it remains well above levels that prevailed earlier this year.

Other spreads have continued to march higher. For instance, 'BB'-rated junk bonds now trade at more than 14 percentage points above comparable Treasury bonds -- a crushing borrowing cost for many low-rated companies -- compared to a spread of less than six percentage points before September.


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