Fed to cut rates again
Fed to cut rates again
Untitled DocumentTuesday, Oct. 28
Posted 8 a.m. Eastern
Fed to cut rates again this week
It should come as no surprise that the Federal Open Market Committee is expected to cut interest rates at their regularly scheduled meeting concluding Wednesday. Another half-point cut is most likely, and would bring the federal funds rate to 1 percent.
Sound familiar? Yes, 1 percent, the same 1 percent federal funds rate we encountered in 2003 and became well acquainted with over the ensuing 12-month period. The same 1 percent that many blame for this mess. I don’t subscribe to that theory myself, but can’t help but point out the irony. As the saying goes, “You’re either part of the problem or part of the solution.” Unless, of course, its low interest rates we’re talking about, in which case you’re both.
The consumer impact of another Fed rate cut is dubious, but our friendly Fed doesn’t have the luxury of holding anything back amid a global credit crunch, recession and asset deflation. In short, they must throw out all the stops, and that means a federal funds rate of 1 percent may not be the bottom. With persistent credit tensions and mortgage spreads now hitting new highs, anything is possible, including a federal funds rate actually being pushed to zero.
Far be it from me to suggest that a more effective step toward easing the credit crunch and the mortgage crisis would be for the Fed to plunge whole hog into mortgage-backed securities and 10-year Treasury notes in the hope of bringing fixed mortgage rates down in a substantial and sustainable way. Getting fixed mortgage rates well below 6 percent and keeping them there would entice bargain-hunting homebuyers into the marketplace and facilitate refinancing for homeowners trying to get out of adjustable rate mortgages. Cutting short-term interest rates doesn’t help fixed mortgage rates and only directly helps adjustable mortgage resets tied to Treasury indexes, not LIBOR. What it does for credit card and home equity lines of credit won’t help enough — or in the right way.
The best news savers can take away now is the fact that inflation will fall far enough, fast enough that the 4 percent CD yields will once again provide a tangible after-inflation return.
Reader e-mail: Two reader e-mails today. The first deals with the economy.
“The economic situation in my view: Banks used to loan monies to families based on income: Rates that balloon after a few years is the bank rolling the dice that someone who “could” afford the “now” payment, and defaulting on the balloon payment. (No responsiblity there). Most banking institutions “used to” have their customers and the banks interest when it came to loans. The fuel prices spike or whatever it really is, killed the economy for all folks, regardless of whom. That furthered the snowball to roll. The Wall Street deal, there is “no” excuse for those companies invovled ( I call it greed). The real thing that bothered me about that issue is the C.E.O.’s and the C.F.O.’s had to see that coming long before it got there and still gave out bonuses. I thought you gave out bonuses for great performance, not ruining companies, and peoples lives. What happened to the folks that run these outfits, did they quit common sense school? What are they teaching in college now? I find this inexcusable. That reminded me of the “savings & loan” issue that happened several years ago.”
This next e-mail comes from Jeff, a mortgage guy that wants to “show I do have some common sense.”
“why don’t they change the index all the adjustables rate mortgages use? That is within the provision of the loan and would creat an immediate relief for most homeowners. Also, they could look to do a rollback to the intro rate–typically low 6’s when these loans were made. If the intent is to keep people in their homes, let’s not give them a gift,
let’s give them a payment they can afford. Finally, I don’t think we should look to give $$$ to the banks to buy the assets, but I would not be opposed to a tax relief that would fund lower payments similiar to a buydown in interest rates. We need to stablize prices, fundamentally change people into believing their home is foremost just that —their house not an investment and taxpayers should be treated equitablly in whatever plan is designed. Some people will lose their homes—but some people have always lost their homes, some companies have/will take losses, but some companies have always taken losses, some investors will lose money (most already have!) but some investors always have lost money. The American dream is the opportunity for Home ownership not the gaurantee of Home ownership. If they are looking for fundamental changes, it should begin in k-12 education and having some financial commonsense and basic skills taught.”