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Tail Wags Dog, Market Jitters Forces Fed to Drop Rates

MoneysThe 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!

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Writer for national real estate opinion column AgentGenius.com, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.

6 Comments

6 Comments

  1. Hunter Jackson

    June 29, 2008 at 8:44 pm

    If only they would either drop them more, or loosen restrictions. rates seem to be currently heading up…too much.

  2. robin | fort Lauderdale Real Estate

    June 29, 2008 at 9:08 pm

    I don’t think low rates matter. Checking historical mortgage rate charts , rates are still quite low. I remember selling homes in the 80’s when rates were 18%. Agents worrying about rates is a waste of time..IMO.

  3. Jim

    June 29, 2008 at 10:23 pm

    Federal rates still have not gone up. Bernanke talks a good game. Something tells me you have to have excellent credit to even sniff the lowest rates that are offered right now.

  4. Jennifer in Louisville

    July 2, 2008 at 6:55 am

    I agree that Bernanke does talk a good game. Hopefully his guidance is keep the worst part at bay. Its really quite a difficult job because there are SO MANY variables, and if you do too much or too little, it can end up being worse than doing nothing at all.

  5. Jim Hodges Dog Training

    August 4, 2008 at 4:44 pm

    Count me as one that thinks Bernanke is using his head for a hat rack only. We are in a terrible position with both deflationary and inflationary components present in the market today.

    If I had to bet, I would bet inflation is where we are going. Don’t listen to the guy. Watch what he does. Inflation. Inflation. Inflation.

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