Will They or Won’t They?
Posted on September 18, 2007
Filed Under Interest Rates |
The Federal Reserve Board is meeting later today and if you listen to the pundits this morning they seem almost giddy about the prospects of the Fed lowering the discount rate. What is more interesting is the expectation already built into the equity markets over this possible cut. The expectations are so high that a quarter point cut would probably see little positive impact on the markets and no cut at all will cause a mild sell-off.
But, since it looks like we will see a cut, if not today, definitely before the end of the year, let’s examine what that means to the average investor out there.
A quarter point will not significantly lower your holding costs. It will not enhance your profit margins much. It will not stop the foreclosure tsunami on the horizon and it certainly will not reverse the current real estate price correction.
But, what will it do?
It will boost consumer confidence because of the media hype it will receive and consumer confidence is a very important element of our economy.
It will increase the chance inflation will return and perhaps spike a little.
It will take political pressure off [insert your favorite politco here] to “do something” about the economy.
It will appease the stock and bond markets which have already factored in much more than the expected cut.
But, in the end it will do little to affect the underlying economic fundamentals.
A savvy investor doesn’t rely on funding sources so closely tied to the consumer markets. They are too unstable. If you have been following along for the last couple of years then you are well positioned for this market, no matter what the Federal Reserve does today or any other day. But, if you are still dependent on funding from banks or hard money lenders, well, you are probably giddy about the prospects of the possible cut today too. But, you shouldn’t be.
Lowered interest rates increase your competition and that is the biggest factor investors face. Increased competition tends to drive up costs and drive down profit margins. But, if you have prepared for this market buy reducing your debt load and increasing your cash reserves you are ready no matter what the Fed does and no matter what the market pundits claim.
So, watch for the announcement this afternoon and then watch the markets over the next few weeks.
It’s going to be fun!
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