Despite all the Talk, Will the Fed Cut Rates in September?
Posted on August 28, 2007
Filed Under Interest Rates |
This is a guest article from Tim Greene, he is one of the authors at The Real Estate Field Guide.
The credit liquidity crisis has pushed the political dynamics into interesting territory. The markets have been expecting, often even demanding a cut in the Fed Rate for most of this year. It wasn’t needed and the Federal Reserve Governors held fast. But, things are different now…
The Governors have signaled, in fact flat out stated, they will do whatever it takes to solve the credit liquidity crisis. They took a number of interesting steps recently to help. For example, they extended the repayment time to thirty days for large banks and thrifts. They also pumped a significant sum into the credit markets and bought of the less desirable debt offerings on the secondary market.
It had the desired effect. The credit spread has shrunk and the T-Bill rates have stabilized but the danger is it all temporary. It is likely the least bit of bad news will cause the “run to quality” to return with a vengeance. Given that, it is almost a certainty we will see a rate cut between now and the end of the year.
I put the odds of at least one cut at better than 80%, possibly as early as the September meeting of the Fed, and the odds for two cuts by the end of the year at 50%.
It will be interesting to watch because the Federal Reserve has a dismal track record in this area and the possibility of over-shooting the target and causing inflation to spike is very real.
But, what will this mean for the average real estate investor?
It won’t change things much because there are other far more pressing issues affecting your ability to fund your deals.
If you have sources of private funds, you are in good shape. If you don’t you are going to find it increasingly difficult to fund deals and increase your holdings.
Given the current environment, when the Field Guide returns I expect a major focus to be on private money options.
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5 Responses to “Despite all the Talk, Will the Fed Cut Rates in September?”
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Seeing as how they have been willing in the recent past (2003) to go as low as 1% I have no doubt they’d be willing to beat the rate down like a rented mule* in order to (in their mind) stabilize things). (*with respect to Dan Rather and the 2004 election commentary, that man has some amusing expressions).
Since the governors will take all measures to help the credit liquidity crisis then it is indeed a good news for all of us . If cutting rates could help stabilized the liquidity crisis then it should be taken into consideration as well although I myself wonder if they are indeed willing to cut rates?. Anyway let us just wait for upcoming September and see what the governors could do about this problems.
WAKE UP CALL….
Since the US Dollar Index is below 80 and FALLING, the Fed just might RAISE the interest rate to protect the USD and to make it more attractive to foreign investors who happen to be our economic life line.
At this point in time, the DOLLAR is more important to the Fed than real estate and the stock market.
The US economy is just one big Enron waiting to happen.
In the words of Milton Friedman, “Inflation is taxation without legislation.”
Given the Fed’s historic objectives of controlling inflation, and its disdain over irrational exuberance in markets, I remain perplexed that the Fed would consider lowering its Fed Funds rate to right a wrong with lending practices driven by irrational exuberance among banks and hedge funds. Moreover, I find it disturbing that FHA is coming to the rescue by lowering its underwriting standards, as well.
To quote Milton Friedman again, “The government solution to a problem is usually as bad as the problem.”
Adding to the conundrum is the widely accepted theory and practice that interest rates are a function of inflation, risk, and the value of the underlying security. Yet the lenders, whom determined the foreclosed properties to be of sufficient security to underwrite a loan, are urging the Fed to reduce rates. Has the banking industry forgotten the definition of “underwrite”?
It is not surprising that markets are upset over adjustable-rate, sub-prime mortgages conceived during a time when Federal Funds rate was at an all-time low (1.0 percent), wages increase at a mere 3.0 percent (CPI), and hyper-inflation is rampant in the housing market. Rather than bailing out the culprits who got our economy into this mess, we should ride out the market, and let the chips fall where they deserve to fall. Otherwise, we will witness a worse wreck down the road where everyone suffers.
I guess the Fed believes that “A spoonful of sugar helps the medicine go down” but go down the medicine must if we are going to get past this malasie. In the end, the markets will correct itself, life will go on, some people will be better off, some will be worse off and that is nothing new. Such is the double-edge sword know as “risk”. The best thing to do is to learn from it, adjust and carry on.