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Fed trims key bank rate

Jeff Caldwell 11/30/2011 @ 9:35am Multimedia Editor for Agriculture.com and Successful Farming magazine.

In a move to stabilize the shaky world economy but will also likely provide bullish fuel for the grain markets, the U.S. Federal Reserve Bank joined 5 other world central banks to lower the overnight index swap rate, or the amount banks pay to move funds between one another.

The banks agreed Wednesday to "lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points," according to a Fed statement. In other words, borrowing money is now cheaper.

The move comes in an effort to "mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Fed says. And, one consequence of the move is a bullish jolt for the financial markets, including the grains.

"The banks have agreed to print enough money to try and fix the global liquidity problem, and they'll worry about inflation later. This is a good call," says grain market analyst and trader Alan Kluis. "And the results...Wow! Global stock markets are soaring, the S&P 500 is now up 36 points and corn went from down 7 to up 4, soybeans from down 6 to up 7 and wheat prices at 7:15 were up 6 to 7 cents. To top it off, the dollar is down nearly 2%, which is excellent for U.S. grain exports."

But, other traders say Wednesday's rate cut can't be deemed a success until later on, when "real sustainable growth" can be seen.

"Seems like a last ditch desperation play to avoid a meltdown. In any event, I think that if this does not work I am not sure we have anymore arrows left in the quiver to sling at this thing," says ICAP Energy LLC Derivatives Manager Scott Shellady. Inflation is bad, but deflation is worse and driving rates to zero with a prevailing mentality that things will just get cheaper is a scary prospect if we do not start to see real sustainable growth."

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