Posted on 03/16/2008 4:32:55 AM PDT by TigerLikesRooster
Calls for 1-point rate reduction grow louder
Bear Stearns shocker triggers forecasts for whopper cut to 2%
By Laura Mandaro, MarketWatch
Last Update: 7:52 PM ET Mar 14, 2008
SAN FRANCISCO (Menafn - MarketWatch) -- Expectations that Federal Reserve next week will cut rates by a full percentage point, to 2%, gained traction among economists and traders Friday after a bailout of Bear Stearns Cos. revealed more fault lines in the U.S. financial system.
Citigroup economists said they anticipate Fed policy-makers will lower the federal funds rate by a point to 2% next week from the current 3%, "and more cannot be ruled out."
"Aggressive action is needed to stabilize the financial setting," according to economists in a research report led by Citi's Robert DiClemente. The decision by the New York Fed and JPMorgan Chase & Co. JPM to provide financing to Bear Stearns BSC "underscores the current fragility of the system."
On Friday, Bear Stearns said that it was forced to draw on short-term financing from the Fed, through J.P. Morgan, after its liquidity "deteriorated significantly" during the past 24 hours. The news sank stocks and pushed investors further into bonds and commodities, which are increasingly seen as a safe haven to market disruptions. See full story.
Credit-market troubles and slowing growth have the potential to unleash the worst U.S. recession in more than 25 years, the Citigroup economists said.
Also feeding into expectations of deeper rate cuts, the Labor Department announced that consumer inflation in February was flat from January, or less than economists were anticipating, though prices gained 4% from the year-ago month. See full story.
Economists in general have been more cautious on the likelihood of rate cuts than the futures market, though they have raised their expectations recently.
Those surveyed by MarketWatch now anticipate the Fed will cut rates by 75 basis points next week, to 2.25%, deeper than the 50-basis point cut they anticipated a week ago.
Since it started cutting rates in September during the first wave of global credit crunch, the central bank has slashed interest rates to 3% from 5.25%. As problems in the subprime-mortgage market spread to other parts of the banking system, creating big write-downs on Wall Street and freezing whole pockets of the credit market, it jumped in with bigger, surprise cuts this year.
Led by Chairman Ben Bernanke, the Fed has used other tools to try to ease the ongoing credit crunch, such as making itself available for $400 billion in bank and broker loans.
The Fed's apparent willingness to loosen the money supply, combined with nearly daily blowups in the financial system, has pushed up the odds on futures that price in the likelihood of rate changes. Traders in this market are now anticipating a 100-basis point cut in March.
The April contract Friday jumped to 97.88, which translates to 100% odds the Fed will lower interest rates by 75 basis points, and more than 50% odds of an additional 25 basis points -- which would bring short-term interest rates to 2%.
On Thursday, federal funds futures priced in 88% odds for just a 75 basis-point cut. Some 42,557 April futures contracts, which market participants use as a snapshot of expectations on the March meeting, traded hands on the Chicago Board of Trade.
One basis point is 1/100th of a percent.
Deutsche Bank economist Joseph LaVorgna said Friday that his bank now believes the Fed will cut rates by 75 basis points on Tuesday, "and the odds of a 100 basis cut are growing."
"There has been no letup in financial market deterioration," he wrote in a research report. "Whether the Fed opts for an unprecedented 100 basis-point move will depend largely on financial-market conditions, namely whether the market further raises the probability of systemic solvency issues."
Sounds fabulous!
May be too soon as the election is in Nov. The irony is is that if people would just drive 55-60 mph instead of 75-80 mph, crude oil would crash as ports are loaded with tankers waiting for market signals that oil has peaked to dump that oil.
2% is the lower limit. The power range is 2% to 5%. Outside that range there is no effect. But, the main effect anymore is mostly on the international value of the money. It’s out of control, or as much in control as the Palestinians.
If the actual value of a house drops 20% but the dollar loses 20% of it's value the price in dollars stays the same even though the actual value of the house has still lost 20%.
The affect of a devalued dollar is inflation - not just its value compared to other currencies. In the case of the house, rising inflation helps hide the falling value of the house. Why do you think prices on virtually everything are going up rapidly? We don't live in a vacuum. Oil is priced in dollars, going straight up. Energy is the life blood of any modern economy. Gold priced in dollars, going straight up (as are virtually any other metal). The vast majority of the things we consume have underlying components from raw materials to full assemblies from outside the country - all going up. It just takes time for the affects to trickle through the economy. For people and businesses to raise prices because they find they can't purchase as much and replace inventories using the same number of dollars.
Now back to the house. If the bank has the value of the house as $300,000 on their books, they show it as $300,000 worth of collateral. They are required to have a given amount of collateral for how much they loan out. If the house drops to $200,000 they are in trouble not only because they may have more into it than they can get back from it, but because they can't show its value as being $300,000 anymore forcing them to find more cash or getting rid of more debt in order to meet the collateral requirements. Now if you devalue the dollar that house is worth more dollars (not more actual value). With it numerically worth more dollars the banks show less of a loss numerically if they foreclose. But more importantly that asset on their books is numerically worth more dollars balancing their books keeping them solvent. This while everything that is held in dollars is actually becoming worth less across the board - inflation.
That would suggest that a certain specific total amount of inflation is necessary to maintain solvency of the existing loan portfolios. On the other hand, taking such action would likely cause many other countries to shift toward using something other than the dollar as a reserve currency. I would expect that too would have bounded effects, but I have no idea how big they'd be.
Do you see the dollar as stabilizing at some lower threshhold, or will the quick drop have such cascading effects that it plummets into oblivion?
Gold bug.
I bought my home well under value. The market in Michigan is mostly being attacked by the DETROIT area. Over there, it is a complete disaster brought on by Jenny & the gang.
I am in Grand Rapids MI and we have seen a slight decline but we have not witnessed the same pain the people on the East side of the state have witnessed. For the most part, homes in good repair sell for decent value in the Grand Rapids market and the “new listings on market” has started to reverse.
As far as my mortgage goes, mine will go down as it is based on the 1 month LIBOR. I do not have to refinance at all. In fact, I will be paid in full within two years. The type of mortgage I have is the very same mortgage which will soon be gaining popularity here in the states and will RESCUE the USA housing market. It is set up like a commercial sweep account. It DOES NOT compound your interest daily and also allows you to use your income to drive the daily principal balance lower so you are assessed less interest.
When you can use your income in a mortgage equation, you will be surprised at how small a role the interest rate actually plays. Mortgages are about interest paid. Banks dont give a damn about your interest rate......they amortize your payment so you will most likely make a minimum payment anyway....they want your checking account more than your mortgage.
Think about it....you get a mortgage today and lets say you have a friend in the industry and they got you a
“great rate” of 5.75% FIXED for 30 years. Do you think your friend (or any mortgage loan officer at a brokerage or sitting behind a desk at a bank) has the nerve to tell you that that wonderful rate also comes with the 8th wonder of the world known as compounding interest? Did they tell you that same interest is also calculated 30 days in arrears? I will bet they didnt. IMHO 30 yr fixed rate mortgages are the single most destructful financial instrument devised by the banking system. They are more responsible for the housing crunch than ARMS and the subprime mess we have today. For people who need to access their equity, they have to spend thousands in refinance costs and fees.
I throw my entire income at my mortgage payment. All of it. When I do, the day my deposit goes in, it instantly decreases my principal balance. At the end of the day, I am assessed interest for that daily balance. What is nice is that my daily balance is lower because of my income driving the loan. If I need cash, I just write a check (which is attached to the mortgage) and my balance goes up the amount of my withdraw amount. No fees, no change in interest rate, no crazy 18% interest on a line of credit. While my income is in my mortgage, it is saving me interest and since my interest paid is less....I pay more principal down. Mortgages are all about interest paid....ask any bank.
Easy example......you and your neighbor both take out a
$120,000 mortgage.
you take out the mortgage type I have and your neighbor goes and sees his buddy at the bank and gets 5.75%
We will assume you each make $60,000 per year and the payment on $120,000 is $700 per month which includes taxes & insurance. Neither of you have any additional outside debt. Here is how the two of you would fare:
YOU
Payoff in 11.3 years Only pay $27,466 in total interest to the bank. Not too bad
THEM
They pay off in 30 years. Pay $132,103 in total interest.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.