When the Federal Reserve Board meets later this month to consider lowering interest rates, it seems the question will once again be -- by how much? Chairman Ben Bernanke and crew have been bringing up the rear for over a year, doing what they are supposed to do ... fret over inflation.
This next meeting might find them doing an about face. Oil prices have been coming down in the face of disappointing economic news, and if that continues Fed Officials may feel they have enough political cover to act. The next meeting of the Committee will be held on Tuesday-Wednesday, January 29-30, 2008.
After the last meeting, the Street was disappointed by the 25 basis point reduction in rates. When the "baby did not get it's bottle", the stock market responded with a 300 point drop in the DJIA. This time, I do not think even a cut of 50 basis point will be taken seriously by Wall Street market makers if the next two weeks are similar to the last two weeks. I think expectations are high that the Fed will make a significant move and 50 basis points would be the minimum. But that might be just a blip, coming too late, since the impact would trail the cut by six months at least.
Here is the U.S. Federal Reserve Meeting Minutes for the December 11 meeting from Bloomberg.com. The Federal Reserve's Open Market Committee reduced two short-term interest rates at that time. It cut the target for the federal funds rate by a quarter of a percentage point, to 4.25%, and slashed the discount rate a quarter of a percentage point, to 4.75%.
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility -- the discount window. The Federal Reserve Banks offers three discount window programs to depository institutions: primary credit, secondary credit and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
I have not been a big supporter of the past rate cuts because they have trashed the dollar and pushed oil prices higher, both adding a big financial burden to American households. However, if oil prices continue to float downward on weaker demand, as unemployment continues to rise, and as the banking industry continues to be frazzled, I could change my mind. But it is not my mind that affects rates, it is Ben Bernanke's, and a larger than anticipated rate cut might be what he thinks he needs to do to regain his economic reigns when the world is doubting his capacity to do so.
Second guessing the Federal Reserve has turned into sport on Wall Street and the chatter I hear all the way on the west coast is that rates should drop ... a point; if not this month, then very soon thereafter. The pressure is building to do something now so that the impact can unfold prior to the serious presidential campaigning in the late summer and fall. Who says The Fed is independent?
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. Read his Chasing Value and Serious Money columns.
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Reader Comments (Page 1 of 1)
1-16-2008 @ 2:03PM
Donna said...
The false sense of security with the lowering of interest rates is part of the blame for our possible recession.
1-16-2008 @ 2:08PM
Nidhi said...
With that statement from Bernanke, the market now expects minimum of 50points on Jan 30th, 75 would a surprise and 100 points would be a "Shock and Awe" as Kudlow puts it. I think a shock and awe is needed to bolster the morale among the traders.
http://www.preparedinvestor.com
1-16-2008 @ 6:54PM
D said...
Once there were strict underwriting mortgage guidelines...now it's subprime,no money down, no docs, etc....the lender's should suffer over this one and the Fed is trying to help them....as for the consumer who signed the mortgage, it is all about let's keep up with the Jones'...if the monthly payment fits, then that's all that is necessary....there isn't any rocket science about lending money....ABILITY and INTENT...very simple! Too bad we strayed from that!
1-16-2008 @ 6:58PM
Susan said...
Lower the lending rates NOW! Remember the mid 1960's? The lending rate for homes was about 2.00%. My parents (now deceased, GOD BLESS them) both worked- were able to BUY a new ranch style with 3BD, 1 Full Bath, full basement, two car, central, etc in a new division for $16,995 @ 2.00% 30 yrs. They owned it for 41 years exactly, sold for $129,995 in 2005. It had been PAID for, for 20 yrs! Still in like new condition because they could afford the upkeep, upgrades, remodel,and you know, the 10 yr hot water heater thing a few times. They were able to ENJOY their lives. They always felt SORRY for 'Us Kids' because it is almost impossible to even make a months rent any where let alone save anything to try to buy 'THE HOME OF OUR DREAMS'. People can't afford a box of cereal, gallon of milk, and toilet paper because of all of the analysts' predictions. In their day a paper sack FULL of groceries cost about $1, today same food items, same sack, about $35 or MORE. Bring it DOWN!! Organics were cheap & natural, now I question the natural thing and NOT CHEAP!.... What does everyone expect out of the human being these days! Slow it down & slow down the ENTROPY!!!
1-22-2008 @ 10:40AM
Kimberly Florida Mortgage Broker said...
I am glad the rates are dropping.
I disagree with Donna's thoughts of a false sense of security with the lowering of interest rates is part of the blame for our possible recession.
With so many houses in foreclosure (24 per day in my county) and with houses in the area in a depreciated state...meaning worth less than you owe or paid for it... we need a stimulus to the market. This should spark up investors to get back into the game. Otherwise there is no way to get out of the slump. Lending requirements are tight and the so called subprime market has turned to FHA or keep renting for others. Can't go blame the brokers for people getting into debt there are many factors. My area can't sell homes because they are worth less than they bought it so it makes it hard if jobs change, economy changes for service industry area like mine, etc.
So drop the rates and bring in outside $ to get the market going in the upward direction again.