This week in the US mortgage rates fell. Easing concern the Federal Reserve decision to lower down the mortgage rates by purchasing mortgage-backed securities was losing momentum.

It was said by mortgage buyer Freddie Mac of McLean, Virginia, in a statement that the average 30-year rate dropped to 5.32% which was 5.42%.While the 15-year rate was at 4.77 %.

Efforts are being made by Federal Reserve Chairman Ben S. Bernanke to lower down the borrowing costs. He has got a $1.25 trillion program to purchase securities backed by home loans.

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A meeting of The Federal Open Market Committee held today, and while any changes to short-term interest rates are light-years away, many have the question in their minds that if the Fed will further target long-term interest rates.

In Treasury yields an early June spike had the 10-year note touching 4 percent and conforming 30-year, zero-point fixed rates reaching up to 6 percent. In treasury approximately $1 trillion are left, GSE debt buybacks and mortgage-backed over the balance of 2009, now with this it become possible to stop mortgage rate from rising further.

But in the Mortgage Bankers Association Applications Survey Refinance Index from May 20 through June 17 of this year there has been a fall of 58 percent which shows that to stop the mortgage rates from rising further and to push mortgage rates down to such levels that generate a frenzy of refinancing and home buying activity are two different things. And there difference is too big than what we think.

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Moments Ago Fed Funds Rate was cut to down to 1.00% bringing it down 50 basis points. It was expected as 25 basis was too low and 75 basis points were thought as too high.

This new kind of pushed Fed into corner. It is running out of Monetary options. few fiscal tools are left. It is very unlikely that Fed will lower the rates below One Percent. but some sources says that this option is still on tables. we did an article on Zero interest rate a few days back.

We at FLR don’t think that Fed cutting rate will ease the credit market. The current  problem is about stinking balance sheets. Govt Bail outs Or Easy Credit from Fed can not do any thing but to inflate them by putting either equity or credit on these balance sheets. It does not take away the stink from the balance sheet. The problem with liquidity of commercial paper will not be solved unless all those toxic assets like sub prime credit are removed from them.

DOW and S&P 500 took a dip after rate cut. and 10 year bond yields rallied upwards…..  watch Bloomberg for more details.

As news continues to pour in that Fed Rates are likely to go near or at zero interest rate level, we think that Fed. should get out of its stunned posture and take more drastic measures like bringing the rates down to zero percent levels. These are indeed difficult times and magnanimity of problems require Fed. to take magnanimous steps. It should act fast and give the economy the much needed fiscal jolt. Unfortunately, Fed has a history of doing too little and too late.

After detailed analysis of issue and reading the material suggested below, we have come to conclusion that there was never before a time, so good ,for adopting zero interest rate policy. we put forth our set of 10 reasons why Fed. should go for it.

1. Zero interest rate will encourage investment throughout the economy.
2. Zero interest rate will make capital purchases financially more attractive.
3. Zero interest rates will encourage people to Invest rather than Lend.
4. It will create more jobs as people will make investments in securities or real plant and equipment.
5. Zero interest rates are expected to take gas out of Commodities and Gold.
6. Probably it is the best tool to get out of depression. (We used it in 1930′s)
7. Liquidity trap is just a theoretical construct, not an actual phenomenon.
8. Remove the burden on tax payers to bailout banks and stock markets.
9. Bank of Japan has successfully used this model for decades to support Its Fiscal System.
10. Fed can adopt “Non-Standard” fiscal measures to stimulate growth.

Further Reading and References(open in new window)

• http://en.wikipedia.org/wiki/Zero_interest_rate_policy
• http://economics.about.com/cs/interestrates/a/zero_interest.htm
• http://www.imf.org/external/pubs/cat/longres.cfm?sk=15474.0
• http://www.financialstandard.com.au/news/view/24185/
• http://www.mmhabits.com/what-if-the-fed-cuts-to-0-the-zero-interest-rate-policy/
• http://en.wikipedia.org/wiki/Liquidity_trap