The Fed dropped rates by a whopping 0.75% this morning. This was not expected at all. This is the biggest drop in rates since 1990. Now considering there has been a major terrorist attack, two bubble crashes and one international financial crisis which almost took down the entire Asian financial markets during this same time and the Fed didn’t do anything this drastic, you have to wonder what the heck is going on.
I know major world markets were shaken yesterday and the EU had to try to calm them down a bit, but seriously what is going on that we do not know? Personally, I don’t know that there is any one event that is causing concern. However, I think the market is slowing waking up to the fact that the US is headed for a recession and that the fundamentals of the worlds largest economy is not on a solid footing.
With record deficits, weak exports, a declining currency the US is essentially a country living on borrowed money. I mean the credit card will only take you so far. At some point the bill will come due. I could be completely wrong here, but if the price of gold is any indication, then I say the market is waking up to the fact that maybe just maybe things are on the wrong track.
For the short term, the rate cut helps borrowers on HELOC’s and eases some credit card payments. Long term mortgage rates are not directly influenced but I see a rise in mortgage rates with this rate cut. That is because the Fed move stabilizes the equity markets and makes bonds less attractive, hence, a fall in bond pricing and rise in its yield. Mortgage rates will not rise overnight but we should see rates increase by 0.5% by spring time.
Only time will tell, but the way things are going right now Mr. Bernanke better have a good reason for this, otherwise we’re headed for some really turbulent times!