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Fed Slows Aggressive Moves With Quarter-Point Rate Cut
May 1st, 2008 1:18 PM
With a seventh consecutive rate cut, the Federal Reserve took a less aggressive stance than in previous meetings by dropping the federal funds rate a quarter-point to 2%, the lowest level for the benchmark since 2004.


Following a two-day regular meeting, the Fed continued a steady rate cutting campaign which began last September when the markets were rocked by a worsening mortgage crisis that spread into a general liquidity crisis reaching deep into the economy.

During the first three months of 2008, the central bank made a series of more aggressive rate cuts, including two three-quarter-point moves and one half-point cut.

Wall Street had anticipated the latest quarter-point move and the general market consensus would suggest that the latest rate cut will be the last in the near future, barring some unforeseen crisis.

In its comments, the Fed showed concern about both weak growth and inflation as it signaled it was ready to "act as needed to promote sustainable economic growth and stability."

Although recent rate cuts have not had unanimous approval, this time around there were two dissenters arguing against any changes: Richard Fisher of the Dallas regional Fed bank, and Charles Plosser of the Philadelphia Fed.

Although there is debate in the White House about the use of the term, many economists believe the nation already has fallen into a recession, underscoring the importance of the Federal Reserves decisions.

"Financial markets remain under considerable stress and tight credit conditions and deepening housing contractions are likely to weigh on economic growth over the next few quarters," declared Fed officials.

The chief economist at Moody's Economy.com echoed the sentiment of many by predicting the Fed will maintain rates at their current level for remainder of the year.

Expecting the jobless rate to climb from 5.1% at latest count to 6% in early 2009, Mark Zandi of Moody’s believes the Federal Reserve “won't start raising interest rates until the unemployment rate has peaked and started coming back down."
Posted by Sandra L. Kent on May 1st, 2008 1:18 PMPost a Comment (0)

Oil Shoots Higher
May 9th, 2008 2:09 PM

Oil Shoots Higher

With little economic data on the schedule, the major economic story during the week was the continued rise in oil prices, which hit a new record high of $126 per barrel. Oil prices have nearly doubled since last summer. A major Wall Street investment bank issued a forecast this week that predicted a spike in oil prices to between $150 and $200 per barrel, possibly before the end of the year. The impact of rising oil prices on mortgage markets could be either positive or negative, depending on a couple of factors. Rising oil prices leads to higher prices for goods and services, and higher inflation usually leads to higher mortgage rates. On the other hand, higher energy costs slow economic activity, which serves to reduce inflationary pressures. In general, stock investors don't like to see higher oil prices, while mortgage investors are less concerned. Mortgage rates fell a little during the week.

In the housing sector, the March Pending Home Sales index fell slightly from February, matching expectations. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show small declines. The National Association of Realtors (NAR) latest forecast predicted that conditions will remain soft for the first half of 2008, but that activity will pick up during the second half of the year.

Other significant news for the housing sector came out during the week as well. Fannie Mae announced that it will buy the new Jumbo Conforming mortgages for the same prices as those below the old conforming loan limit, which should make some larger mortgages more affordable. In addition, a $300 billion FHA housing loan guarantee program passed a vote in the House. More hurdles remain, as the program must be approved by the Senate and the President. If passed, this program will assist troubled borrowers in refinancing into a mortgage with more affordable terms, resulting in a reduction in the number of foreclosures.

Posted by Sandra L. Kent on May 9th, 2008 2:09 PMPost a Comment (0)
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