What Will The Fed Do #2?

At 1:15 CST we will know but most predict the benchmark rate (Federal Funds Rate) to be cut by .50% to 1%. Some think that unless significant recovery signals are seen in the near future the borrowing costs for large financial institutions could be at 0% by June of next year. One of the disturbing factors concerning this unprecedented move not seen since the Eisenhower administration is the fact that many of these banks are still hoarding the cash or looking for other opportunities to buy "distressed" banks instead of lending for which these moves were intended. Washington voiced a stern message yesterday to banks looking at doing this!

KEEP IN MIND....that mortgage rates WILL NOT be affected by any cut or hike to the benchmark lending rate! More over it's how the overall macro economic environment reacts to this cut that will determine mortgage rates fate. Mortgages rates are directly related to the buying and selling of Mortgage Backed Securities (MBS) which are like riding an insane roller coaster ride with their volatility. Typically in a "normal" financial environment (keep in mind we are not in any sense of the word in a normal environment) a rate cut would lend itself to higher inflationary concerns thus diminishing the value of fixed income assets (i.e. MBS) and thus their luster would be tainted. What am I saying? Bluntly in a normal world MBS would be hurt by a rate cut because of inflationary pressure thus leading to higher rates. However, with that being said I highly doubt we will see that affect. Why? Because the economy is contracting and commodity prices have tumbled leading to less of an inflationary issue and more about an economic rebound concern.

We are living through unprecedented times folks! There are no models, past experiences, graphs, or scientific projects for what we are experiencing! Anyone who tells you any differently is simply wrong. With every passing day we see new records in the DOW, huge swings in mortgage rates, further signs of a recession and other negative factors. Hang in there, buckle up and be smart. Do business with the right people, do your homework and educate yourself and things will work out.

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