The Cons of Cutting Rates:
Dollarâ€™s declining value (if the Fed makes it easier to lend, more money will move in to circulation. A higher money supply decreases the overall value, making imports more expensive and consequently causing inflation.)
High Gross Domestic Product (3rd quarter GDP came in today at 3.9%, a hot measure. If we get to producing too much, employment and wage inflation will both flare up, meaning consumers have more spendable capital. When businesses see that their customers have more money, they raise prices to make better profits, which is inflationary)
Inflation (The Consumer Price Index, Personal Consumptions Expenditures Index and Wage Inflation gauges are all above what the Fed has said is their respective â€œcomfort zonesâ€. A lot of this can be blamed on gas price increases, but it begs the question of whether we have already boarded the bullet-train to inflation town. So, as long as youâ€™re not interested in eating, travelling anywhere or heating your home any time soon, you should see no change in your monthly expenses.)
The Pros of Cutting Rates:
Weak housing and financial sectors (due to failing subprime mortgages being included in a ton of different mutual funds and investment vehicles, as they fall they take the whole financial sector of our economy with them. This is â€œarguablyâ€ spilling over into higher unemployment and a national slowdown in property appreciation)
Credit crunch (institutional lending has slowed down dramatically, so the Fed may want to re-ignite them by making wholesale lending more attractive through lower interest rates. This will increase the banksâ€™ profit margins overall and allow them to entertain the idea of exposing themselves to more risk and loosening lending guidelines, allowing more people to borrow)
The Verdict: Â¼ cut to Fed Funds Rate:
Buckle your seatbelts, kids. This may be a very short and fast ride. Further loosening of money will only last as long as inflation stays tame. And unless we see a drop in oil prices (which isnâ€™t looking likely) coupled with a slowdown in consumer spending (which the holiday season will not allow), expect inflation measures to rise. My advice: if youâ€™re looking to guarantee yourself a deal, now is the time to do it. The Fed will double back and raise rates if we see inflation start to skyrocket. Waiting around at a time of such volatility is literally gambling with your financial future.
Bank of America contributes to a fund that will assist in easing tensions on the already problematic mortgage secondary market and then promptly states that they will no longer be writing mortgages. Quite the mixed message they are sendingâ€¦
Despite Countrywideâ€™s 1st quarterly loss in 25 years, stocks soared as a direct result of their grass-roots approach to negotiating with borrowers and finding common ground. They are focusing on the actual problem as opposed to circuitous politics and board-room policies. Hopefully their success will spawn a middle-ground approach by more lenders and ease the mortgage market difficulties from the bottom-up.
Foreclosures maintain at notably high levels, forcing property values down as a result. Expect the median price to slowly continue its downward spiral. Also, as holiday bills start coming in early 2008, home-sellers will be pressured further to sell for less. As mortgage lenders cautiously start to roll out some more mortgage products and re-expand the market, good deals should be plentiful in early 2008.