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Federal Reserve cuts interest rates to 2 percent

The Federal Reserve cut the Federal funds rate a quarter-point to 2 percent today, the lowest since 2004.  The Fed indicated that its dramatic monetary easing the last 7 months was coming to an end.  The Federal funds rate was 5.25% last September and has been lowered aggressively to offset the housing and credit crises and the economic downturn.

  The Feds rate cuts and emergency actions have ameliorated the impact of the global credit crunch and helped to restore liquidity and confidence to the financial markets.  The stock market is 9% above the low it established in March as investment bank Bear Stearns stock collapsed.

  The Federal Reserve moved to a neutral outlook shifting to a less aggressive policy.  They indicated there are still continued fears of a recession and the Fed could lower rates in the future.  The low rates have fueled inflation causing record prices in food and energy and weakened the dollar against foreign currencies.

  Prior to the rate announcement the Commerce Department announced that gross domestic product (GDP) grew 0.6% in the first quarter, the same amount that GDP grew in the fourth quarter of 2007.  The last two quarters have shown extremely weak growth but and avoided the technical definition of a recession as two consecutive quarters of negative growth.

  The Fed stated, “Household and business spending has been subdued and labor markets have softened further.  Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”  The Fed said it “expects inflation to moderate in coming quarters.”

  The labor department said that employment compensation rose 0.7% in the first quarter, the smallest increase in two years.   A separate report showed that consumer spending was growing at the slowest rate since 2001 as stagnant wages and lower home prices have people feeling less wealthy.

Federal Reserve Ready To Lower Interest Rates

The Federal Reserve began the two day Federal Open Market Committee (FOMC) meeting that will culminate in an interest rate decision tomorrow.    Economic forecasters predict that the Fed will reduce the Fed funds rate by a quarter-point to 2.0%.  The rate was as high as 5.25% last September. 

  It is likely the Fed will pause after this meeting to determine the effects of its prior rate reductions and analyze their impact.  Pressure is building to end the easing in the form of record high commodity prices in food and energy.  The dollar has weakened to record low levels and outside the housing sector the economy is not as weak as expected.  Stock market prices have increased lately and indications are the credit crisis is improving.  Also consider the $152 billion tax rebate stimulus and the lagged effect of 3% of prior easing. 

  Recently weakness in the housing market has been offset by strength in the job market.  The Labor Department reported that claims for unemployment benefits fell by 33,000 to 342,000.  Forecasters had been expecting a rise of 3,000.    The Case-Shiller home price index indicated home prices fell by 12.7 percent in February compared to a year earlier.  The index dropped 10.7 percent in January and 9.1 percent in December.  The cities with the largest annual price declines were Las Vegas 22.8 percent, Miami 21.7 percent  and Phoenix down 19 percent.

  Robert Shiller, the Yale professor who invented the index, said that home prices could fall more than the 30 percent drop of the 1930s depression.  Housing inventory has soared to record levels as home mortgage financing has restricted and foreclosures add to the supply.  Over one million units are still under construction and experts expect the inventory overhang to persist and continue to apply downward pressure on prices.

  For a chart of home prices the last 12 years please follow this Case-Shiller and OFHEO Indices link.

The Federal Reserve cut its key lending rate by ¾ of a percent to 2.25%. The latest slash of the interest rate continues the Fed’s aggressive decrease in the lending rate from 5.25% last October.

The United States economy has been hit by a series of shocks. There has been a profound decrease in housing, a decrease in economic activity and a credit crunch affecting investment banks. The combination of factors has contributed to widespread decrease in retail sales, job hiring and stock market prices. The Fed is decreasing rates in an effort to offset these factors and increase economic growth.

Ben Bernanke, chairman of the Federal Reserve, announced in the Fed policy statement that the outlook for economic activity has weakened and they are on watch for further weakness. The Fed also indicated that inflationary pressures are a concern. Two federal reserve governors dissented from the decision arguing for less aggressive action. It is unusual to find dissent in Federal Reserve decisions.

Some analysts believe the Federal Reserve is near the end of the rate cutting process. Having the Federal Funds rate below the 2% level caused some of the problem excessive credit expansion that is now causing problems with defaults. Such a low Funds rate also can lead to inflation through a weaker dollar. Signs of inflation are evident in many grains, such as corn and wheat, which are at multi year highs. Other commodities which are inflating in price are gold now over $1000 an ounce, and oil over $100 a barrel.

The Federal Reserve is hoping that the low funds rate will encourage lenders to provide lower mortgage rates to homeowners. Lower home mortgage rates can help offset the housing crises by enabling borrowers to refinance their loan making home ownership costs lower.

JP Morgan Chase agreed to increase its bid to take over investment bank Bear Stearns to $10 a share. The latest bid is an increase over the $2 per share announced March 16^th.

In the latest sign of the ongoing credit crisis, investment bank Bear Stearns agreed on March 16th to be taken over by JP Morgan Chase. The original price of $2 a share was a stunning collapse of one of the oldest investment banks on Wall Street. The $2 per share price values the company at $236 million, compared to a value of $8.3 billion two weeks earlier.

The sale was made necessary because of a classic “run on the bank.” Numerous clients had demanded their money from Bear Stearns due to rumors of poor financial health. Since Bear Stearns is so leveraged it could not meet the demands and required an immediate increase in funds. JP Morgan agreed to take over Bear Stearns liabilities. In an unusual move the Federal Reserve provided a $30 billion credit line to JP Morgan to facilitate the transaction.

In the updated terms announced today, JP Morgan will also receive 39.5% of Bear Stearns by buying 95 million newly issued shares. The newly issued shares and higher price are aimed at ensuring the deal goes through and to appease shareholders unhappy with the original lower price. The Fed’s role was renegotiated to guarantee $29 billion, instead of $30 billion, of Bear Stearns assets while JP Morgan will now absorb the first billion of potential losses.

Bear Stearns was one of the largest providers of collateralized debt obligations (CDO’s) the last five years. CDO’s are financial products that pool home mortgage securities and then are sold to investors. The CDO’s were a major force in the increase in subprime mortgage lending which contributed to the recent housing inflation and bubble. The decrease in home prices has caused the CDO’s to drop in price causing hundreds of billions in losses for banks, brokerages and investors.

February 12, 2008 – Henry Paulson, US Treasury Secretary, announced the Project Lifeline plan that would give 30 days of relief to housing borrowers facing foreclosure.  The six top mortgage lenders joined Paulson in the effort to prevent borrowers from falling into foreclosure.

Project Lifeline is a measure that will broaden and improve outreach efforts to distressed borrowers.  Project Lifeline is supported by Bank of America, Citigroup, Countrywide, JP Morgan Chase, Washington Mutual and Wells Fargo.  All six mortgage lenders are a part of HOPE NOW alliance, a group working to help borrowers avoid foreclosure.  The HOPE NOW alliance encourages homeowners needing help to call their mortgage lender.

Project lifeline will put a 30 day freeze on the foreclosure process.  This added time frame is needed to give lenders the opportunity to consider each borrower’s situation to determine if a lower payment is possible.  Lenders will contact homeowners that are 90 or more days late on their mortgage payments and freeze the foreclosure process while a loan modification, or mortgage refinance, is considered.

The Federal Reserve has predicted that over two million borrowers face higher rates in the next two years as their mortgages reset even higher.

Project Lifeline is the latest Bush administration response to the ongoing housing mortgage crises.  Lenders earlier pledged to freeze rate increases on subprime loans for up to 5 years.  This latest program is a significant expansion of preventing foreclosure because it covers all classes of borrowers, including prime borrowers.

Some critics said the measure falls short of what is needed to address the growing housing foreclosure problem.  “A month long moratorium on mortgage foreclosures is like a band-aid when the patient really needs surgery,” said AFL-CIO president John Sweeney. Senator Dick Durbin, a democrat from Illinois, has proposed legislation that would permit borrowers facing foreclosure to alter the terms of their mortgages in bankruptcy proceedings to make their payments more affordable, a solution that current law does not allow.

The Federal Reserve dropped interest rates a half a percentage point today. The Federal Funds rate was slashed from 3.5% to 3.0%. This latest decrease comes after a three quarter point decrease just last week from 4.25% to 3.5%. The January 22 decrease was the first inter meeting rate change since 2001 and the largest since 1984. Since last fall the Fed has lowered the rate from 5.25% down to the now 3.0%.

The Federal Reserve has stated that financial markets are under stress and the committee was acting in a timely manner to address risks. That same committee also reassured investors it will act as needed in the future.

The Federal Reserve is acting in an attempt to prevent a possible recession. Growth in the U.S. economy slowed sharply in the fourth quarter as consumers decreased spending and the real estate downturn accelerated. The Commerce Department said gross domestic product grew at an annual rate of .6 percent for the fourth quarter, the slowest rate in five years.

Borrowers and businesses are likely to see their cost of borrowing decrease as a result of the Federal Reserve move. Commercial Banks are expected to lower their prime interest rate by half a percent, from 6.5 percent to 6.0 percent. The prime rate applies to credit cards, home equity lines of credit and other mortgage loans. The Fed funds rate and the prime rate are now at three year lows.

Which it makes it more imperative then ever to really look at either buying, with real estate pricing down, or at refinancing your mortgage to get really the best mortgage rates in years.

Federal Reserve Slashes rates Three Quarters of a Point

The US Federal Reserve slashed interest rates ¾ of a point on Tuesday driving rates back down to near historic lows. Current mortgage interest rates, for a 30 year mortgage, were down to near 5.25% and rates for a 15 year mortgage were down to 4.85%. This has given millions of homeowners the opportunity to now refinance their mortgages, (a driving force of intent behind this large of a drop) with many saving upwards of several percentage points, which can literally mean thousands off of your mortgage.

Driving The Real Estate Market
It is also hoped that this cut would help drive a sluggish real estate market allowing more and more non-homeowners the ability to qualify for a home purchase loan through lower rates which can mean qualifying for more home due to the now lower mortgage payments. Read the rest of this entry »