Fed Day Is Here!!!

The long awaited "D-Day" is here. At 1:15 CST time the Federal Reserve will decide what to do with the federal funds rate, a key component to affecting interest rates, and quite possibly even the discount rate, the rate at which banks can borrow money from The Federal Reserve. Many expect the Fed to reduce the federal funds rate by at least .25% and some are optimistic about a .50% reduction. At the same time in an effort to again try and improve market liquidity and the "credit crunch" some are anticipating a .25% reduction in the discount rate (currently at 5.75%) after the .25% reduction on August 17th failed to really spark borrowing from this discount window.

The housing and credit markets have really taken a hit since January 1st with over 50,000 financial sector jobs lost, foreclosures at an all time high and up 115% over last year, and a record slowdown in the housing market. Many have said the Fed is too late; however, late is better than never in this case. Hopefully the increased liquidity, the reduction in rates, and knowledge of how to value the risky mortgage backed securities will spark a pick up in the housing sector. Many believe the ability to value mortgage backed securities alone is enough to spark a boost. This sector has really been hit hard as these portfolios have been burdened with heavy losses from rising delinquencies and foreclosures, mostly associated with sub-prime loans.
In a surprising effort by the government we have also seen FHA guideline changes to accomodate sub-prime woes and bills currently being discussed to lift the loan size requirements for Fannie Mae and Freddie Mac currently set at $417,000. This would further boost the housing market as "jumbo" loans would now be backed by government sponsored entities. Jumbo loans have recently been hit hard with tighter guidelines and rising rates as scared investors no longer have an appetite for these riskier loans. Hopefully today's decision will shed some light on what the future holds for the housing crisis!

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