Will The Feds Cut Rates?

Sep 9th, 2007 @ 8:29 AM by Alden Smith

Top companies like Countrywide Financial and Hovnanian Enterprises Inc have done a good job of painting a dire view of the condition of the market.  They feel that if the Fed doesn’t bail out the economy with a rate cut, that the economy will worsen and bring turmoil to the market place.  You have to wonder if this is self serving or not.  Right now, the key overnight lending rate, known as the federal funds rate, stands at 5.25 percent. It has stood at this rate since last summer.  This follows on the heels of 17 quarter-point increases between 2004-2006.  This was done to keep inflation in check while the economy expanded.

The Real Estate Market

The National Association of Realtors reported on Wednesday that the market in housing has dropped 12.2% in July, the biggest drop ever recorded.  This was seen before the credit tightening crunch begin, making the numbers much more significant.  Is this a sign of market failure?

Looking on the Bright Side

Indicators show that the market is not in as bad a shape as the top financial companies would make it appear.  Consumers spent freely last month on back to school supplies and related items, such as clothing.  A new report from the Institute for Supply Management shows that the credit market woes did little in August to thwart modest expansion in the manufacturing sector.  The Fed’s Beige Book, a book that looks at conditions by locale reports that the weakness in the housing market has deepened, but also report there has been little spillover from the financial market volatility into the overall economy. The report’s first sentence said that the economy “continued to expand.”

What The Fed will Do

You have to admire Ben Bernanke and his team of central bankers.  Bernanke has stated that he would only lower short-term interest rates if the economy needed a stimulus.  He is not in the habit of bailing out investors and hedge fund managers, and this is a good thing.  This group has put themselves in the position they are in because of their own decisions, not because of any weakness in the housing sector or the overall market.  It is clear that Bernanke will not bail them out, and it is also clear that this is what they are looking for.

The Future of the Market

The market place is of course unstable.  Jobs have been lost, and the anticipated 110,000 increase in payroll has not happened.  We do not know yet what the losses in the mortgage securities markets will do in the long run.  But it is clear that the Fed will not bail out the people who have made wrong investments or gambled on the market.  And that is a good thing…