If you're an investor in the stock market (which I am) and eagerly expected the 0.5 point interest rate cut today to have an 
impact on your investments you may be in for a shock when you look at your account this evening. Good old Ben Bernacke decided to cut interest rates by 0.25 point to 4.25% instead of 0.5 point and stocks took a tumble in late afternoon trading to the tune of more than 290 points!!!
Doesn't the FED recognize a few signs that the economy is slowing?
The squeezing of the credit market will also create challenges in the real estate market as we move into 2008. Earlier this week Lenn Harley wrote about FANNIE AND FREDDIE REDEFINING THE MEANING OF "SUBPRIME". In Lenn's post, and in my meetings w/my preferred lender, it is clear that the subprime market of old is gone and lenders have tightened the clamps on their wallets. Buyers with less than 30%, yes 30% down, and credit scores that aren't stellar will have to pay a "premium" interest rate. In effect, causing consumers to have less cash in their wallets to help the economy along.
Why was this rate cut so important? An aggressive rate cut by the fed would hopefully help the credit and mortgage crisis. When the FED dropped the rate only a quarter of a percent it had a negative psychological effect on investors and consumers. They were looking for serious signs that the FED recognized the economic woes and would work aggressively to keep the economy from going into a recession.
What is your opinion on the rate cut? Too much, too little, on target?
Tracy Santrock, REALTOR, specializes in relocation, buyer agency, listings & investment properties in the Triangle area of North Carolina with Fonville Morisey. Visit www.TriangleNCHomes4Sale.com.
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I have been watching the market all day today. I am glad not to be a broker today thats for sure.
I don't follow the market that closely anymore.... In the early days of internet I had my real time ticker scrolling the screen.
The stock market is as unpredictable as the housing market--I expect a lot of volatility in both arenas until after the November elections.
Rebecca - Worse than being a broker is an investor invested in the market :(
Dan - My husband watches the market like a hawk - so I get daily, make that hourly, updates.
It's a delicate juggling act to give the US economy a psychological boost and protect the US dollar from further devalautation overseas. The Fed has had some tough calls to make...
Ginger
Norma - Good point. The guys on Capitol Hill had better get their act together if they want to win an election. In the mean time.
Ginger - Great point.
This summer when we went on our cruise to Europe the $$ the expense was unreal! If the Fed cuts too low inflation will get out of control which is yet another problem/challenge.
Tracy, I haven't heard the news today, been in meetings.
Hey Missy,
It was late in the day but big news all together. It's worth a look at Yahoo Finance or Bloomsbury.
Although I agree that the devaluation of the dollar is a big issue, the immediate problem is liquidity and the Fed needed to cut more aggressively. One of the biggest problems is that we have let the middle class sink or swim and they are sinking. Wages have eroded terribly and this fact, above all else could create massive problems. Lack of liquidity on the part of the middle and working classes could create a recession that resembles a depression. The middle and working classes extracted money from their homes to pay their bills in the hope that "things would HAVE to get better." They didn't. Outsourcing, Importing skilled H1-B visa people, wage erosion in general are only getting worse. It is part and parcel of a FAILED policy on the part of the republican party. Trickle down did NOT trickle anywhere - it stayed at the top - and that means that the coming recession will be serious, long and deep. But liquidity is a major tool that would soften the blow - trouble is the Fed really isn't interested in protecting the working stiff. It's still worried about inflation - STUPID.
Ruthmarie,
All your points are well taken. If I may quote you:
"Wages have eroded terribly" - You betcha.
"Lack of liquidity on the part of the middle and working classes" - Another big problem.
"The middle and working classes extracted money from their homes to pay their bills" - I saw an article that said that equity is the new "credit line". Yikes!!
"the coming recession will be serious, long and deep" - I know it scares me!!
Ben, please notice, we are sinking here!!
I feel like we are on a seesaw....if they lower the rates...inflation...if they don't recession....YIKEs
Great graphic!!!! I will use the Titanic to bring the message home! BEN!!! Are you listening?????? What's that saying? "Sail on oh ship of state???" Hard to do at the bottom of the Atlantic.
Tracy,
Evidently Wall Street expected more than the 0.25% cut and therefore went on a selling spree. More was needed to provide extra liquidity to the ailing financial system. Citibank reportedly is in a bad shape partly because of exposure to subprime paper.
Tracy - Yes, I'm with you. Ben missed a golden opportunity. As you correctly noted, Wall Street reflected its opinion.
Wall Street Rises Sharply After Federal Reserve Unveils Plan to Work With Other Central Banks -
This is today's headline. Wall Street was up 120 points this morning on the new news. I feel like I'm on a roller coaster. Maybe this is why the market has been so volatile.
The steps today to now work with EUROPEAN (Central) banks signals their understanding that simply making more money available is doing NOTHING to fix the overall credit crunch.
Wall Streets hope was that they would lower by 50 bbps so that credit card bills and equity line payments would offset the $3 at the pumps... But even if they'd done that - no one will see the December credit card statement until January. The consumer's lack of spending could push us closer to the R word... I don't think that's happened in an election year, so the roller coaster ride is JUST BEGINNING!
Eleanor - Fantastic feedback on the entire FED issue. I know so many agents that don't follow the market and they should - because it impacts everyone's real estate business and the economy as a whole.
Eleanor - That was an excellent analysis of how the fed is thinking. The trouble is that the "solutions" to both the exchange issue and liquidity issues are at cross purposes. However, I think the liquidity issue is far more urgent. If we are pushed into a severe recession due to a credit crunch, the middle and working classes will be VERY hard hit. They've lost so much ground, they average American is in no shape to withstand the kind of tightening that would be required to ease the exchange issue.
Tracy.... interesting conversation. In all honesty, in lowering the Fed rate could have made things worse. It doesn't have a true affect on the actual interest rates. Sure, by lowering them, it could free up some money if you have a home equity line of credit....or those credit cards. But do you think credit card companies are going to lower anything. How many heloc loans are out there? These are just my opinions. Where the focus need to be places on is the true cost of living, the oil crisis, and the medium income that is putting a clamp on so many families.
You talked about Lenn Harley's post. Not sure if you read the one that I wrote on 12/8, Will Conventional loans be like the subprime mess, but I broke down the difference between the conventional changes and FHA. Yes, FHA loan limits are low in some areas, but I am writing a blog on this later today. And I didn't want to link my comparison post unless it's okay. But something like that needs to be talked about more, because this will help a lot of people.
Overall, what people fail to realize are those lenders that don't have the full spectrum of programs. This was part of the reason for the subprime mess. Lenders not having FHA will now put conventional people into higher rate loans. This is where we need to educate the client on what is out there. Realtors need to at least know the options. Again, these are just my opinions. Which is what I wrote about in a post on 12/11, Mortgage & Real Estate problems of 2007.. any solutions? I think one of the biggest is letting the market correct itself. Again, just my opinion. In any case, good discussion here.
I hope rates will drop more. I'm not sure what this means in the long run but I believe its a step in the right direction.
Tracy, I agree a 50 basis point cut sure would have made my day! I suppose we will just have to wait to see what the next Fed meeting brings. Come on Ben, get with it!!