Fed leaves rates unchanged
Untitled DocumentFed leaves rate unchanged
It’s hard to imagine that just a few days ago, this appeared to be a ho-hum Fed meeting. But the events of the weekend put the Fed at center stage and had Wall Street clamoring for an interest rate cut. They didn’t get it.
I, for one, am greatly relieved. And if you are a saver, you should be, too. Since the Fed moved to the sidelines at the end of April, we’ve seen some tidy improvement in CD yields. With the oil price-bubble popping (remember all those who said oil at $140 per barrel was justified based on demand from China and India?), there is hope that inflation pressures will indeed moderate as the Fed has long predicted. So with the horizon looking just a bit brighter for savers, the notion that the Fed would undermine that by cutting interest rates again had to get under your skin. Fortunately, savers won’t be doing any more bailouts either.
The first seven interest rate cuts did nothing - NOTHING - to vanquish the credit crunch. What would No. 8 have done that the first seven didn’t? I’ll tell you what another rate cut would have done (or will do, in the event we eventually get a rate cut): undercut the dollar, lead to a rise in oil prices and further stoke inflation. How does that benefit anyone? Be glad the Fed resisted the urge.
The statement issued by the Fed is now very balanced instead of leaning toward inflation concerns, as was the case one month ago. Fair enough, given the ugliness of the ongoing credit crunch, which at 13 months and counting is much like a baseball game in extra innings that shows no signs of ending.
The key problem is the condition of financial markets, not the economy. The economy is limping along, but credit markets are hospitalized in intensive care. Pumping another $70 billion in liquidity into the markets and expanding the list of accepted collateral at the discount window are the steps needed to combat the credit crunch, not another interest rate cut.
Please send me an e-mail to let me know how the credit crunch and the economic downturn are affecting you. Also, weigh in on whether you think the Fed should have cut interest rates more or not.
Here are a few e-mails that have come in recently. I’ve interspersed some of my own comments.
“Always enjoy reading your columns. I have one point that is really sticking with me. With the demise of “stated” programs, what is the small-business (owner) to do? We have alienated a significant segment of our society. I agree that stated programs were abused, but the complete dismissal of them is going to come back and bite us again. I have been approached by so many small-business owners looking to refi out of their ARMs, and because they have a good accountant, they can’t. I have always thought that the entrepreneur is the backbone of this Country. What do you think will come of this?”
While the pendulum swung way too far to the side of easy credit during the housing boom, this is an indicator that it has swung too far in the other direction toward restrictive credit. Not something that will be alleviated soon, but a point well taken. Consider a small-business owner that has started a business within the past year or so and lacks two years of tax returns as proof of income. Even with deep pockets and excellent credit, that still might not be enough to qualify.
“The economy! It is a dice-rolling situation right now … jobs, and any financial matter, has become a plague. Some are itching worse than others. But the plague has been felt by all.
“I have a couple of friends that rolled the dice and found jobs; some are even working overtime at their newly acquired jobs! While others are hard pressed to barely break 40 hours or even worse, are unemployed. The same gamble is with the mortgage situation. Some folks are sitting pretty, while others will spend the next seven to 10 years rebuilding their FICO due to Bank owned, foreclosed or Bankruptcy situations. I think that with proper information, rolling the dice and taking chances can prove to be rewarding. (It is hoped) the economy will be cured of this plague and we can all roll the dice without as much fear.”
The next question deals with maximizing deposit insurance coverage.
“I am interested in the correct way for married couples to title accounts to shield up to $1.1M. I have been having significant heartburn knowing my wife and I are exposed at our banks due to the size of deposits. Can you advise?”
I was quoted in The New York Times on this subject last week and have since fielded a few such inquiries. Here’s an excerpt from a fine story by my colleague Laura Bruce that details the subject thoroughly.
If FDIC coverage is inadequate for your general or retirement account, there are ways to increase coverage by setting up deposits in different categories of legal ownership. These categories are insured separately up to the maximum allowed. Here’s an example of how a married couple could insure $1.1 million at one bank when the new reform legislation begins.
Husband and wife each have $100,000 in an individual account.
The couple has $200,000 in a joint account.
Each has $250,000 in an individual retirement account.
Each sets up a $100,000 revocable trust account, payable on death, naming each other as beneficiaries.
For more information on setting up these accounts and checking to see if your money is covered, visit the FDIC’s Web site.
And our final contestant of the day.
“Are financial commentators and the public being too pessimistic? Your point is valid about jobs being shed. The data says so. But the data also says that the economy is growing. Is it possible that the U.S. economy is transforming to grab a larger share of the world export market and that new jobs will come from this area to replace the job losses that are occurring in other areas. This takes time … “
My thanks to all those who wrote in.