Fed lowers key rate down to 1%
The FOMC moved agressively on Wednesday to lower the fed funds rate down to one percent, the lowest level the fed funds rate has been at since 2001. The Fed has faced an enormous amount of challenges over the past twelve months in their attempts to keep the economy moving forward following the fallout in the housing markets. The government has agressively moved to try and restore investor confidence and bring liquidity back into the marketplace.
The drop of the fed funds rate will have an immediate benefit to consumers who have loans that are tied into the prime rate which is now at 4%. The lowering of this key interest rate does not mean that we will see a drop in long term fixed mortgage rates. Long term fixed mortgage rates generally do not move following a fed rate cut. As more homeowners are refinancing today into fixed rate mortgage loans the widening of the yield curve, which could make short term adjustable rate mortgage loans more attractive is not likely to gather much attention.
Consumers with credit cards tied directly into the prime rate and home owners with home equity lines of credit that are tied into the prime rate could see a reduction in their interest due as early as next month. The fed also left the door open to additional future rate cuts should the market and economy continue to struggle.
World markets continue their decline
The true testament that we now live in a global economy is becoming more evident as the world markets have sold off over the past thirty days. Friday saw both the Asian and European stock markets drop sharply as investors are growing increasingly concerned that there will be a deep economic recession ahead. The GDP report out of Great Britain, added fuel to the fire that the economy is only going to get worse in the near future.
The U.S. stock market was closed down in pre market trading as fears of a signicant sell off pushed the market down over 550 pts in pre market trading. There was speculation that the market could drop over 1000 pts in one day as panic seems to be spreading into all areas of the economy. The recent sell off can be further attributed to hedge funds that have to liquidate holdings as they are over leveraged and are essentially forced into selling the market.
There was some good news in the market that was overshadowed on Friday. U.S. home sales climbed higher for the first time in the past thirteen months. Mortgage rates have moved lower over the past two weeks and are begining to move closer to the six percent range. There is also a growing sentiment that the government will roll out a more strategic plan aimed at slowing down the foreclosure crisis. If the housing market finds a bottom, the economy will likely be able to turn around much quicker and the recession could be over in the next 12 months.
Stock market moves like a roller coaster
Amusement parks accross the world could take a lesson from the anxiety created by the stock market over the past two weeks as increases and decreases have been rather dramatic. This week alone the market has seen one of the largest increases and decreases in history as investors look to find a direction to the market as growing concerns over a global recession set in.
The market turned course in trading on Thursday as investors shrugged off a poor economic report and looked to buy into stocks whose valuations were depressed after the major market sell of on Wednesday. The dramatic ups and downs of the market have not carried over to mortgage rates. Interest rates on loans have continued to climb higher. Long term fixed rate mortgages were fast approaching seven percent as the lack of demand in the secondary market has pushed rates up. Home owners who have procrastinated in refinancing could be in for a large shock if they have been holding off in hopes their adjustable rate mortgage would not be increasing. The recent tightening in the credit markets will be sending short term index’s up and carry adjustable rate mortgages higher along the way.
Auto loan financing is also becoming more difficult. Applicants with credit scores under seven hundred may find it difficult to obtain a car loan. Access to easy credit for business and consumers will become more challenging moving forward.
World markets look to rebound
The international markets have moved to agressively shore up positions of the worlds largest banks in response to the large financial sell off created by poor regulatory management. Reviewing the events of the past year, the starting point of the down turn has always been linked to the U.S. housing market collapse, blamed directly on subprime mortgage lending.
The collapse of the housing market was really the tip of the iceberg. The worlds largest banks, insurance companies and financial companies exploited poor oversight to rig their ballance sheets over the past five years. These companies participate in secondary derrivative markets, where they have been leveraging assets at ratios of 50 to 1. As the value of their balance sheets has deteriorated, the companies are required to post additional collateral to help ensure they are keeping the correct capital ratios. The challenge of raising capital has become much more difficult as they have continued to see the value of their assets dwindle, leaving those with capital in a position of not willing to rescue the ailing companies. This issue has become further complicated by the interbank lending that has essentially stopped. The secondary capital credit market has stopped lending as no entity has trust in their counterparties.
The end result is stock portfolios are off by over 40% during the past 12 months, home values continue to decline and the rheotoric continues to increase. The world leaders of the largest countries have finally united with a plan to help raise capital for these financial companies and help to try and restore confidence within the market. The stock market is looking at a recovery rally and mortgage rates have moved back above six percent.
Economic slowdown persists
The U.S. economy is in a full blown recession. Even the most optimists economists who believed that the U.S. economy would have a period of slow growth, but not a recession have changed their tunes. The news on the economy continues to bring out reports that are leaving the most optimists economists with the expectation that the economy is likely to struggle well into 2009. The jobs market reported another round of declines as over 160,000 people were removed from the market in the month of September. Unemployment is continuing to grow and the housing and credit markets remain challenged.
The credit markets could benefit from the recent passage of the seven hundred billion dollar bailout package that the government finally passed last week. There is little optimism that this will have any direct impact on the housing market as there is no direct correlation to stopping the foreclosure crisis. As home values continue to decline, the overall economy will continue to strugle. The improvement in the credit markets may help with lending but this is going to take months if not years to trickle through to the average consumer through employment opportunities, demand for housing, or tax breaks.