“The Federal Reserve cut its main lending rate by three-quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system. Chairman Ben S. Bernanke is struggling to cushion consumers and companies from the worst of the credit freeze that’s made some of the world’s biggest banks reluctant to lend to each other. Officials also showed renewed concern about inflation, making a smaller reduction than traders anticipated.”
“The moves helped relieve some stress in credit markets. Yield differences on a Bloomberg index for Fannie Mae’s current- coupon, 30-year fixed-rate mortgage bonds and 10-year U.S. government notes narrowed about 22 basis points to 176 basis points, or 61 basis points less than the 22-year high reached two weeks ago. Still, mortgage lending will tumble to an eight-year low this year and house prices will continue to decline, according to the Mortgage Bankers Association.”
Fed Cuts Main Rate to 2.25%, Says Outlook `Weakened’ [Bloomberg]

Comments from Plugged-In Readers

  1. Posted by Trip

    FWIW, treasury rates leaped up (not down) on this news. Verdict is still out whether all these cuts will have any impact on mortgage rates other than to drive them up, which is what gotten from them so far (obviously, lots of other factors at play).

  2. Posted by cooper

    That’s because people moved out of treasuries into stocks. The flight to quality trade started to unwind which means people sold treasuries. For the most part spreads are narrowing and for the short term this move will result in lower mortgage rate, but longer term I wouldn’t count on it. I’d give it a week before people have another freak out.

  3. Posted by Dude

    If the theory of mortgage rates being tied to inflation still holds, then rates are going up, not down:
    Regarding the recession odds, it’s looking like a foregone conclusion at this point. The textbook definition of a recession is 2 consecutive quarters of negative GDP growth, as determined by the National Bureau of Economic Research (NBER). Here’s what their president had to say a few days ago:

  4. Posted by anon

    Sweet – my HELOC is now basically free money. The annual savings in interest expense versus last year is equivalent to getting a raise. Booyakasha.

  5. Posted by cooper

    The Two quarter thing isn’t the rule —a group of economists just decide at some point whether we are in one or had one or not. And its true inflation tends to push rates up, other things can push it don a lot more.

  6. Posted by crockergal

    agreed about the HELOC free money…. question is when to lock the rate, as the Fed could push down rates even further…. and how to effectively shelter the income generated by the property we bought with the HELOC cash. Depreciation is not going to save me this year.

  7. Posted by ex SF-er

    “I’d give it a week before people have another freak out”
    that’s my suspicion. I anticipate another good day or two, and then a return to negative trend.(disclosure: I shorted into this rally heavily today, although today’s rally surprised me and my positions are down 1.6% from where I bought them this afternoon)
    however, there has been a BIG change that could bring mortgage rates down (in theory). The Fed will now lend DIRECTLY to the brokerages. perhaps that will free up some liquidity and they will start re-securitizing loans. I personnaly am doubtful of this, but there are many things going on behind the scenes, and you never know.
    the Fed has to figure out a way to get banks to lend to each other again, so that the banks will lend to businesses and consumers. American consumers will always borrow if given the chance, no matter how self-destructive it may be.
    who knows, perhaps the Fed will bow under pressure and start buying all the mortgages. (it’s being proposed).
    of course, all of our tax dollars are at risk now.

  8. Posted by Satchel

    Well, at least the Fed is NOT inflating….yet. I know it is tough to follow with all these programs and acronyms being thrown around, but Bernanke is doing some creative things in order to hide the “weenie of bad debt” on the Fed’s balance sheet for a while at least. This allows the banks to pretend they are solvent.
    We *may* be getting close to the end of the cuts (it will depend on how whether there are disorderly equity declines IMO) – there were two dissents this time, which I didn’t see mentioned here. I think that is why the dollar rallied (albeit from very low levels!).
    But among all these programs and acronyms, did anyone notice that the fed withdrew $11.5 billion in liquidity today? The adjusted monetary base once again (data through 3/12) shows NO monetary inflation – essentially ZERO since the credit crisis “started” on 8/15 ( It’s getting hard to follow the “slosh” of Fed repos, amid all these acronymic programs (TAF, TSLF, PDCF, term repos, TOMO, etc.) but it appears that even as they were cutting today they were withdrawing liquidity on a net basis (
    I do not think that you can get the credit game restarted absent money creation, and I still think the Fed is holding the line. If I know those guys, they are laughing themselves silly over how everyone in the media and the population is talking about how the fed is “inflating” (in between their periodic bouts of stomach sickness that correspond with dates or periods in which banks might be forced to mark their bad assets to market). If people believe the fed is inflating, they will be more likely to hold on to what they perceive to be an inflation hedge – namely real estate and equities – and perhaps to even start buying again. IMO that is the impression the Fed wants to give. Interesting times indeed!
    @ Mole Man – you were wondering about just who is “cheering” and applauding government intervention? Read the comment immediately above this one for but just one example (to add to all the others, including those from Wall Street that the Fed “buy” mortgages outright, which I am pretty sure would require an Act of Congress).

  9. Posted by cooper

    @Satchel. The Fed does not require an act of congress to buy mortgages. If the Fed wanted to use the money to buy goods and services it could do so –it can use that money to buy aircraft, elliot spiters hookers, or whatever without an act of congress.

  10. Posted by Satchel

    I’ve seen both sides argued – whether or not the fed can buy up *any* assets or services and whether it is restricted from *purchases* (as opposed to loans like the PCDF) from any entity other than banks within the Fed Reserve System. I really don’t know the answer, but I know a lot of ink has been spilled about this lately!
    I am going to look into it – with my background as a law student, I am even going to try to wade through the actual Federal Reserve Act! If you have any sections of the Act or learning on this, please post a cite or section #. It should be fun! Like I said, I would like to get to the bottom of this question, and I have a “sneaking suspicion” that the question is about to become VERY important. I’m serious – please post anything you know (general request to all out there) and I will report back in a day or so as well with what I’ve found.

  11. Posted by anono

    Fannie and Freddie’s capital requirements are going to be loosened and they’re either going to cut the dividend or sell more stock (or both) to buy more mortgages, according to today’s NY Times. This is the step needed in tandem with higher “conforming” rates.

  12. Posted by Satchel

    Well, cooper and I have gone back and forth a little on this issue of whether the Fed can buy assets from private parties, etc., without an Act of Congress. I asked if anyone had any learning on this but – who would have thought? – no one seems to care about this, or at least I haven’t given everyone any time. LOL! It is a really geeky subject, but given how much faith everyone is placing in the Fed, and the fact that the Fed does not provide audited financials, lends to insolvent banks IN SECRET leading to sudden “wipeouts” of wealth as in Bear Stearns (you see, Bear couldn’t get the secret TAF funds or the Reg 23a exemptions that Citi subs and JP Morgan surely must be getting – but we’ll never know), and generally is picking and choosing behind the scenes where the losses will be stuffed (hint: it’s going to be mostly with homeowners and taxpayers), one would think this Fed question would generate a little interest??
    Well, here’s what I found, and i’ll be the first to say that the whole learning on this is a mess, and no one seems to know what is legal or not. (and, in truth, the population no longer cares because it has been co-opted in the fraud and deception).
    It appears that my surmise is likely correct. The Fed CANNOT “buy” assets from private entities. Here is the Fed in its own words (from 2004):
    “Thus there is no express authority for the Federal Reserve to purchase under its open market authority such promises to pay as corporate bonds, bank loans, mortgages and credit-card receivables, for example.[cite omitted] Nor is there any express authorization for the Federal Reserve to purchase equities.”
    That Fed paper cited in the link is an extraordinarily interesting piece, and I recommend it enthusiastically.
    HOWEVER, and this is a big caveat, Cooper is on to something here. Under “exigent” circumstances, the Fed has the authority to LEND to anyone against all sorts of assets, and there is some argument today going on whether the Fed has acted improperly with regard to lending against bad assets to entities outside the Fed Reserve System. Ultimately, it may turn out that the Fed actually has “bought” this bad collateral, as the loans fail and the institutions that were extended the credit die their well-deserved deaths. In any event, I am still working on the assumption that the fed will pressure the USG to set up an agency that will ultimately “eat” these losses. The Fed will repo the bad debt back to the surviving companies/banks, which will by them have already sold the toxic junk to the new agency. We’ll see if I am right. I know this gets Cooper mad, but let me stress again, the Fed is a private bank. The “quasi-governmental” agency stuff is just a smokescreen that, among other things, allows the Fed to get away with nontransparency and a complete absence of accounting. What a way to run the world’s most important economy and currency!
    BTW, I came across another article from the Fed in my research from 2001. It’s an interesting read, especially the final line:
    “We urge the Fed and the Treasury to find a way to cooperate, under the auspices of Congress if need be, to ensure that the Fed can continue to restrict its assets to Treasuries in the future.”
    That article is also a worthwhile read, especially with regard to the emphasis on the necessity for bright line rules and the dangers of political interference:
    “However, restricting asset acquisition to Treasuries alone is the only credible, bright line policy because all other assets would involve the Fed in the allocation of credit to one degree or another. Crossing that line at all would create significant problems.” (p. 15)
    My, how times have changed!

  13. Posted by cooper

    That’s just it’s open market authority. There was a paper by the Kansas City Fed that basically listed all the things the Fed could do if things went to hell…but they took it down from the website after 15 minutes. I know during the concerns over deflation in 2001/2002 Greenspan had the idea to buy goods and services if needed in his tool belt.

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