Speculation that the Federal Reserve might be constrained in cutting U.S. interest rates much further below 1.25% because of the damage it could do to money market mutual funds greatly overstates the case, according to a reported Lehman Brothers report.
"At its core, monetary easing is an attempt to penalize safe saving," according to Lehman economist Joseph Abate, in a note to clients. "The lower the return on holding money in super-safe assets, the more likely that people will buy riskier assets, such as corporate debt and stocks - or better yet, spend on goods and services."
This is one reason why Lehman expects the Fed to cut rates to just 50 basis points by June.
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