Federal Reserve Action

I was listening to some analysis about the market and a wildcard to all the our talk is the Federal Reserve. If the FR drops the rate by 1 percent (or more), a lot of the issues causing the selling market would go away. I was wondering what people thought about this and what are the chances that the FR will come in and play safety net.


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Not likely, As a bond trader my feeling is that the Fed will hold steady for now but with a 4.4% unemplyment rate, rising comodity prices and a growing GDP presure on the fed is more likely to raise rates down the road not lower them. The Fed has stated numerous times that its' primary concern is fignting inflation not assett bubles, dollar declines or sector spacific weakness within the economy.


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I agree with morekaos. Also, I don't think that the FED lowering interest rates would save housing. It might make the reset a bit less painful on a few people, but it won't stop the foreclosure tsunami making its way toward us.


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I think the problem with lowering rates (which I would love, btw) is that it would be a very short term fix... rates get lowered to assist people to rush to re-finance, those with HELOCs may be able to lock their rate on their balance, and home sales may begin to grow again. However, sooner, much sooner than later, they'll probably have to raise rates at even quicker pace, which will just prolong the agony for those people who are barely making their payments..


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Fed chairmen do not want the markets to think of them long term as the bonehead who sticks his finger in the dyke every time it begins to leak. They are adamant about being percieved by the markets here and around the world as not being reactionary to day to day data. This Fed is no different and will not ride to the rescue. It is not the rates that really caused this mess. It was and is the Feds lack of oversight that let the market get totally out of control. Rates cannot fix this problem. Only the markets can correct the mistakes. Painfull but a reality in a free market system. Just be happy you are not amongst the dead
<p>I have little faith in the Fed. They went overboard on both fronts - raising rates (and too late) in the late 90's and lowering rates a few years ago. I mean, seriously, Y2K scare? What does that have to do with inflation, the dollar, or the economy?</p>

<p>I'm of the opinion that they will be forced to cut rates because our economy will be badly impacted by housing. </p>

<p>However, I do know that if the Fed does not start to signal that it is going to lower rates by the end of the year, the stock market is going to be hit badly. Bond futures are pricing in a virtual 100% probability of a rate cut by year end, and that serves to prop up equities. If the reality is that the Fed will not cut rates, then stocks will have to price that in by working much lower.</p>

<p>As always, we live in interesting times...</p>


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<p>Futures priced in a 100% cut in rates three months ago and when strong economic number hit the 5 year rose over 5% and that prediction went out the window in a nano-moment. Futures are a fickle thing. This economy is fundamentally strong. I heard doom and gloom for this economy in 2003 (stock market) 2004 ( dollar) 2005 (interest rates) 2006 (oil prices) 2007 (housing) and it just keeps going. Don't underestimate its resilience. It will probably push its way through this too and move on. Rates will likely be forced higher not lower. It is true though, we live in interesting times.</p>


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<p>1. He won't lower rates to stimulate the housing market. In every speech, in every report and in the beige book hit control F and search inflation then do it again with housing. What you will find is inflation is the primary concern and outnumbers housing 5 to 1.</p>

<p>2. If rates are lowered on the fed level who says that rates on mortgages will follow? So far fannie mae 30 year mortgage bonds have followed the the fed very slowly on the way up it is only a matter of time for a correction. If investors feel inflation is there then the bond prices will reflect that and he can drop rates all the way down to 1% and mortgages will still be 7%.</p>

<p>3. Rates were dropped in late 92 and 30 year fixed rates stayed above prime while short term rates of course stayed below. This stimulated home sales for a few months then they died again. Short term ARM loans were very popular at the time because the rates were so low. Many people took on 3 year adjustables because affordability was still an issue. And I can just see the Realtor saying that the market will come back because Esmael Adibi said so and you can just refi. Then the FED woke up and starting fighting inflation again. Three years later OC had a record amount of foreclosures. In 96 you can't blame the job market because in January the employment rate was 4.8% and by December it had dropped to 3.3%. The whole time seeing decent job growth.</p>

<p>So in my opinion which is only worth 2 yen says that he won't lower rates. If he does it will just make things worse. Think about how all the MSM were saying how inflation ebbed last quarter because of lower fuel prices. What did oil trade at today? That cost will be passed onto the consumer and it will show up in the inflation data. </p>

<p> </p>


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Correct all around. That is why I like this blog. Good honest analysis. Pain came last time in the form of collapsing Savings and Loans. This time around it tis the mortgage lenders and investmen banks that fed at the trough. Good ridence. We got along after Lincoln Savings we will make it after American Home Mortgage
Thanks for everyone's feedback. . . bonds and futures are two things that I know very little about.

My concern is that the Fed will be so pressured to cut rates that it will do so just to alleviate fears. The credit crunch is affecting so many sectors that it may drag down the economy to the point where the Feds will have to step in.

I agree that the dropping of rates is not a long term solution but for my more practical (and selfish) interests, I am concerned that the easing of interest rates will allow companies and people just enough breathing room to bring the market back to even. At this point, prices have hardly dropped and I still can't afford to buy I just don't think that a 3 bd townhouse should be worth $600K


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The Feds number one concern is the economy, not the dollar or inflation.<p>

But, when considering the possibility of the Fed lowering rates, you have to put yourself in BB's shoes. Are you willing to tell the Chinese and Japanese CBs, who own $1 tril of our debt, to go stick it in their ear? Even BB realizes that if he overtly floods the world economy with USD, thereby devaluing the USD the Chinese and Japanese are holding, he is double dog daring them to throw all their holdings on the open market.<p>

Chairman Ben is currently blowing up M3 by 11% to 13% per year. Can he really risk more than that?<p>

And you have to consider that BB can lower the overnight to 0% and there is no guarantee that the member banks have to borrow or lend, nor is there any guarantee that anyone else will lend or borrow. Money in this country is not really money. It is debt, and in order for it to be created, someone has to lend it and someone has to borrow it. How many of you are willing to borrow money to purchase a home right now?
Like all investments, the bottom line is psychology. If people feel the roof is falling, the roof will fall. If everyone believes in pipe dreams, the pipes dreams become reality. My extremely uneducated view is that the banks will lower the interest rates because it's in their interests to do so. It's better to have people be on time with their loans than having to have margin calls and write bad loans off on their books. The mortgage companies will love it because people can make their payments and the they won't have to go under. The homeowners may not have to refinance but will just breath a sigh of relief that their monthly payment is 10-15% less than what it is now.

As for the buying of homes, I think there are still plenty of buyers except the houses are overpriced and the market is bad. Buying would increase if 1) house prices come down or 2) the market volume increases.


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<p>Bernake, like Greenspan, does not want to set precedence by making reactive moves that lose the Feds credibility with the credit markets. Independence is all the fed really has and perception that they are betrothen to any interest group or government would forever damage that credibility. All Feds go out of their way to protect this valuable perception. With that in mind they cannot afford to lower rates simply to appease this sector. Didn’t do it in 1994 when they raised rates 3% before an election and collapsed Orange County, and they won't do it now.</p>


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IrvineCommuter and oc-conservative are referring to the "greenspan put", aren't they? is there a "bernanke put"? people once thought so, but i think more are leaning the other way now.

assuming bernanke wants to stay in the job for more than a couple of years. he can:

1- let more air out of the bubble and let greenspan takes the fall (noticed how many greenspan bashers are out now vs 6 months ago? no one calls him the "greatest fed chairman ever" any more!). we've been living in a housing-driven and finance-driven economy for the past 5-7 years. growth like what we've had is just unsustainable further without a serious correction

2- lower rates and give housing a soft landing now. in a couple of more years, when the economy overheats again and goes into an inevitable cyclical funk, take the blame himself.

i vote for #1
I found some articles about the topics. . . comments?

<a href="http://www.marketwatch.com/news/story/story.aspx?guid=%7BA5FE4FC9%2D7D1E%2D4573%2D8E9F%2DF1351D81337B%7D&siteid=rss">www.marketwatch.com/news/story/story.aspx</a>

<a href="http://quote.bloomberg.com/apps/news?pid=20601039&sid=aF1Pq1Z.TzVw">quote.bloomberg.com/apps/news</a>

<a href="http://askmerrill.ml.com/res_article/1,2271,19686,00.html">askmerrill.ml.com/res_article/1,2271,19686,00.html</a>

<a href="http://blogs.wsj.com/economics/2007/07/18/analysis-of-major-themes-in-bernankes-testimony/">blogs.wsj.com/economics/2007/07/18/analysis-of-major-themes-in-bernankes-testimony/</a>


<a href="http://www.thestreet.com/s/dont-listen-to-bernanke-says-cramer/video/cramermarketupdates/10371062.html?puc=_dm">www.thestreet.com/s/dont-listen-to-bernanke-says-cramer/video/cramermarketupdates/10371062.html</a>


New member
In the late 70's inflation got out of control, partly because of rising oil prices, and partly because the FED was unwilling to put the country into a deep recession to get inflation under control. When Reagan came into office he let the newly installed FED chairman <a href="http://en.wikipedia.org/wiki/Paul_Volcker">Paul Volcker </a>do what was necessary to curb inflation -- raise interest rates. It was devastating to the economy, but it set the stage for a long-term economic expansion. I still look back on that time in history and the decisions that were made as being very courageous. Reagan and Volcker took a lot of heat, but they did the right thing.

If Ben Bernanke lowers interest rates, he will be restarting the inflationary cycle Paul Volcker worked to end. The pain of ending an inflationary cycle would, IMO, be worse than taking our medicine now. Any lowering of interest rates will be a huge step backward, and Ben Bernanke knows this.

Inflation is not good. We have lived without it for so long that people forget the problems that go along with inflation. Inflation is a tax on everyone, and it is particularly bad for savers. Borrowers think it is a good thing, but banks respond by raising the cost of borrowing, so it is only good for borrowers with long-term fixed rates. People with credit cards, adjustable rate mortgages, etc. will be hosed by high inflation.

IMO, despite calls to the contrary, the FED will raise interest rates starting later this year, and interest rates will continue to rise slowly over the next 2 or 3 years. The party is over, and it is time to pay the piper.
<p>IR - I respect your opinion, and I could see the Fed trying their best to keep rates steady or lower rates. But I don't see them raising rates. Reason is inflation still remains within their "comfort zone" albeit at the upper end. Couple that with the problems in the credit market, and how could you view a rate increase as a probable event?</p>
<p>Are there people here who would decide to buy if mortgage interest rates were lower? I know that for us even if mortgage interest rates dropped down to 5.5 percent as opposed to the 6.5 I am being quoted now the houses here in Irvine will still be overpriced and not a smart place for our money. Hence buying would still only be an emotional/lifestyle decision with a huge risk attached.</p>

<p>As much as I think the smart decision is for the fed to maintain or even raise rates my gut fears that our nature is to be reactive - thus they will respond to the housing "crisis" - and by doing that most likely prolong it because a drop in interest rates is only going to fix some of the problem - not all. </p>


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<em>"Reason is inflation still remains within their "comfort zone" albeit at the upper end."</em>

If this remains the case, then they will not raise interest rates; however, the activity I have been monitoring in the currency markets (the dollar is imploding) indicates to me that prices of imported goods are going to rise (including oil) and this will create inflation.

In fact, this is the primary reason they combat inflation by raising interest rates because an increase in interest rates makes a country's currency more valuable. It seems very unlikely that the dollar will rally against other major currencies as the rest of the world is raising their interest rates and we are not. Why keep your money in US dollars with 5% interest rates when you can move it to the New Zealand currency and make 8%? international bond funds will chase the highest return which means they chase the currency of the country paying the highest interest rates.

As long as other countries are raising interest rates and we are not, the dollar will continue to fall. As long as the dollar falls, inflation will rise because the cost of imported goods will rise. As inflation rises, the FED will have to raise interest rates.

That is my flow of reasoning that leads me to believe interest rates will rise.

What the currency exchange rates. These will be a leading indicator.

Also, it is my opinion we are at the end of a 25 year cycle of lowering interest rates. The Japanese have depressed interest rates worldwide since the early 90's with 1/2% interest rates in Japan to deal with their own real estate bubble. It resulted in what they consider the "lost decade" of no economic growth. IMO, the age of ultra-low interest rates is over. I look for a return to the historic average of 8% mortgage rates with a distinct possibility of a short term overshoot due to the dramatic increase in foreclosures. I hope to buy when interest rates are 10% or higher and refinance into better terms when the drop to historic norms closer to 8%.