Comments on: Surprise! Fed Cuts Funds Rate by 0.75%

By: Eleua

Eleua — Fri, 25 Jan 2008 17:59:23 +0000

“b” seems to be the only person here who gets it regarding inflation/deflation. We are headded for deflation and interest rates will go up appreciably.

Lock in a low rate if you want, but it will be for a rapidly depreciating asset.

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Rhonda is close on the Fed Funds rate. The Fed Funds Target rate doesn’t set anything, but is more of a barometer of what the inter-bank short-term rates are doing. If the banks are lending to each other at low rates, the FED will drop the FFT. If they are lending at higher rates, the FED will raise.

I will say that the FED’s timing is one of intervention. I also think they are trying to front-run the decline in credit, as they have been trying to defend their low target rate with limited success. If the banks don’t follow, the FED will raise its target to achieve balance.

Lower short-term rates are indicitave of a collapsing commercial credit market (shrinking economy) and rising rates are indicitave of the inverse. When the FED is lowering rates, that’s not cause for celebration (unless you are clueless or trying to catch the bottom of an impending economic boom). When “the FED cuts” you should be bracing for some very chilly winds.

The reason it looks like the FED sets rates (mortgage rates dropping when they cut) is because the demand for credit is shrinking rapidly. As demand drops, the price (interest rate) also drops, and the FED is following that interest rate.

I can look at the declining thermometer outside my house and think one of two things:

-it’s cold outside and that is causing my thermometer to drop, or

-my thermometer is making the weather cold, and if I want it to be 75F, I need to take the hairdryer to my thermometer.

By: Mark

Mark — Thu, 24 Jan 2008 14:36:13 +0000

interesting article on the effect on LIBOR and yeild curve and who actually benefits:

http://globaleconomicanalysis.blogspot.com/2008/01/select-few-are-helped-by-rate-drop.html

By: b

Thu, 24 Jan 2008 06:07:33 +0000

Kary -

That is only partially true. The Fed regulates the banking industry and it wasn’t until a month or two ago that they actually came out with some standards for mortgage lending, closing the barn door a little bit late. Also Greenspan in 2003, when rates were at their lowest, actively encouraged “creative” loan products in the banking industry as being good for everyone and has numerous speeches around that time talking about the subject. This, along with his too deep for too long cuts, is what really spurred the bubble. So while they might not be directly giving out loans to overextended borrowers, they encouraged the market and then turned a blind eye when it was obvious lending standards had turned into fogging a mirror.

By: Rhonda Porter

Rhonda Porter — Thu, 24 Jan 2008 03:17:01 +0000

Well, Kary, I was speaking more to foreclosurefish’s comment. Just backing ya ‘up.

Banks created the products with the teaser rates… Wall Street gobbled up the 550 scores (actually 580 was the lowest I saw…but I’m sure lower scores happened).

By: Kary L. Krismer

Kary L. Krismer — Thu, 24 Jan 2008 03:11:14 +0000

Well I was speaking more of the types of programs available, not necessarily the interest rate. It’s not like the fed does things that ends up with people with 550 credit scores getting loans, or people getting loans with teaser rates.

By: Rhonda Porter

Rhonda Porter — Thu, 24 Jan 2008 02:58:18 +0000

And the Fed does not “create” mortgage interest rates. Only helocs are directly impacted by the Fed lowering the Funds rate (helocs are based on the Prime Rate which are 3% plus the Funds Rate).

By: Kary L. Krismer

Kary L. Krismer — Thu, 24 Jan 2008 02:37:44 +0000

The fed didn’t create easy credit on home loans.

By: foreclosurefish

foreclosurefish — Thu, 24 Jan 2008 02:01:52 +0000

I’m just surprised so few people realize that easy credit and interest rate manipulation by the Federal Reserve was a major contributing factor to the real estate bubble. Now that the bubble burst, the only cure that’s being prescribed is more credit and lower interest rates, along with a number of liquidity injections by central banks. That was the problem in the first place, so how is it supposed to cure the problem that it created? Gold is already back up close to $900, and foreign nations may not be so willing to accept our dollars if we keep devaluing them.

By: Kary L. Krismer

Kary L. Krismer — Wed, 23 Jan 2008 16:09:41 +0000

I agree with “b” somewhat in that the price of a loan doesn’t depend on what the fed does. Loans are a product, and as such it’s supply and demand. That interest rates are low means there’s still plenty of supply to meet the demand that exists today. If either the people wanting to buy these loans goes down, or the people that want to get these loans goes up (both in absolute $$$ not number of people), then interest rates will rise. That has little to nothing to do with the Fed, which is why you get those situations like in the graph that was added to the main piece.

By: Rhonda Porter

Rhonda Porter — Tue, 22 Jan 2008 21:20:22 +0000

Chuck, I added a chart to the post to show you how rates have been reacting to the Fed rate cut. The Fed does not directly control mortgage interest rates. Mortgage interest rates are currently reacting to the Fed’s move and the stock market’s reaction. Fears of recession are driving the rates lower.

When/if the Fed cuts again on Jan. 30…you could see mortgage rates go up.

Regardless…if you’re happy with today’s rates, I suggest you lock.