Libor Rate Falls to Necessary Low
I have long believed that the LIBOR rate, at least in this credit driven economy, is one of the most important economic indicators. The 12-month LIBOR rate has consistently dropped and is now in range of where all previous economic recoveries began.
Common LIBOR Trend
When coming into, and out of, a recession, the LIBOR rate typically falls to one-half to one-third of the pre-recession highs. The recovery that soon follows is often inflationary as banks borrow from eachother and to consumers at lower rates to finance big-ticket items like homes, cars and other “durable goods.”
Where We Were, Where We Are
The 12-month LIBOR rate is generally the best indicator of financing and the availability of credit. August 2009 12-month rates, according to the WSJ, are 1.42%. This reflects well upon the current recovery, with the 12-month rate as high as 5.4% in January 2007. Also, the rates are well in line with the tech bubble recovery when rates dipped as low as 1.28% in September 2003 but maintained a 1.4% rate for much of the recovery.
Libor and the Big Picture
The Libor rate is the most free-market analysis of what the current interest rates should be. Though the Federal Reserve sets rates by controlling the supply side, the Libor rate is set by bids between banks. The current overnight rate is 0-.25%, though the 1month Libor is .27%. A low Libor rate suggests that banks are both well capitalized and willing to lend to other banks.