Yesterday the Federal Reserve Board of Governors cut the Fed funds rate once again, lowering the Prime Rate another 0.25% to 7.5%. While this is good news for homeowners with equity lines and will have positive impact on many borrowing rates, I do not think it was the right move for the economy and for the long term.
The economy grew in the third quarter of 2007 at the biggest rate in the past one and a half years and marked the twenty-fourth consecutive month of positive economic growth; taking us back to the third quarter of 2001--or every quarter since 9/11. Rate cuts should be used when the economy is shrinking or in recession--or appears ready to fall into recession. The underlying economic fundamentals do not show me, and many others, that this is the case with our current economy.
The rate cuts by the Fed were not met with cheer in the bond markets yesterday. Why? Because they are inflationary and bond investors do not like inflation. Lower rates today that could spur inflation tomorrow will lead to even higher rates the day after tomorrow. Much higher rates.
The last cuts the last two months by the Fed seem to me to be motivated not for economic reasons but for emotional reasons--to bolster confidence for investors and appear that the Fed is doing something about the housing and mortgage markets. In fact the lowering of the Fed funds rate may have the opposite effect and instead of helping the markets hurt them as higher rates may become necessary down the road.
Here is a chart of 30 year fixed rate conforming and jumbo rates on the 1st of each month back to last June (rates are based on purchase transaction with good FICO scores, at least 10% down and cost of 1 point--APR not calculated for comparative purposes):
As you can see after spike a few months ago as the subprime issues came to market we have seen a decline in rates as the markets and investors adjusted their portfolios and lending criteria. The market is taking care of mortgage rates and qualifying--the Fed and Congress needs to stay out of it.
Thursday, November 01, 2007
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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