The End of a Fed Cycle

For all his aggressive responses to our current credit crisis, Ben Bernanke certainly does like to end with a light touch. The Fed Funds Rate and the Discount Rate both received a 1/4 point cut on April 30th. This was what most experts predicted. Since rate cuts really take about 6 months to be felt by the economy, the Fed didn’t want to be overly forceful after a recent series of robust rate cuts that haven’t been absorbed yet.

 

However, our country’s economic unwinding seems to still be playing out. Pending home sales data came in -1.0% from February’s data to an reach an all-time low. Consumer confidence hit a 26 year low a couple of weeks ago. Gross Domestic Product for the 1st quarter of 2008 came in at a positive but meager +0.6% annual rate of growth. Crude oil recently hit a new intra-day high of $123.79/barrel based mainly on increased demand, which scares the living daylights out of consumers and businesses.

 

Additionally, these rising worries about an international food crisis are creating food-based inflation, adding fuel to an already growing inflationary fire. Kansas City Fed President Thomas Hoenig stated today that “inflationary pressures now stand at unacceptably high levels.”

 

So, Ben and his crew of Fed Governors cut rates but stated in no uncertain terms that the balance be­tween the risk of negative growth and inflationary pressures had about evened out. So, unless some­thing pretty darn big and catastrophic happens in the next 8 weeks, I would guess that the Fed is about done cutting rates. They wanted to signal that their loose monetary policy would probably stop loos­ening in an attempt to put some more international confidence in the greenback and slow the growth of inflation.

 

So that’s it, Wall Street. This is about as good as the Fed’s gonna make it for you. Enjoy it, because I doubt it’s going to last this way for very long.

Fannie Mae was the subject of much attention when they posted a quarterly loss in earnings and hinted at a potential liquidity problem due to the massive spike in loan defaults. As a result, they sought a capital infusion of 6 billion dollars to even things out and provide a good buffer of liquid assets. Lots of people get worried about the solvency of our secondary mortgage market when things like this hap­pen. But think about it. The Fed bailed out Bear Stearns. Don’t you think they would want to bail out Fannie Mae if it came down to it?

 

With all of this going on, mortgage rates have been staying in a pretty steady range for the past week. If we see a drop in commodity prices like gold and oil or an increase in the value of the dollar relative to other currencies, mortgage rates should benefit. However, inflation and fear of mortgage-backed securities still pressure rates higher.

As a final note, the 1st wave of the tax rebate checks have already been distributed, and more are on their way. While economists are split as to the ultimate impact of these checks on consumer spending, we’re sure to see at least a small sugar-high of spending reflected in the 2nd quarter GDP figures. I find it very interesting how those numbers will come out smack in the middle of the presidential elec­tion season. Convenient, but not altogether surprising.

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