Another Fed Rate Cut on the Horizon...

Do you remember the economic releases back in July 2007? This was when several lenders went bust, and Fannie Mae tightened their lending standards significantly (It definitely affected the ability to get a home loan). Well, do you remember what happened afterwards?

August, 2007 -- The Fed Reserve lowers the discount rate 0.5%. What's a discount rate? Well, this is the money that the Federal Reserve Bank, a quasi-government institution, charges banks. In other words, if a bank needs quick money (they usually have to repay the money in 24 hours) to meet their reserve requirements, then they can borrow the money. This is pretty much the equivalent of me borrowing my mortgage payment for next month, but this is the normal system we live in. Everything is leveraged.

Why have money sitting around? Inflation is eating at it 3.5% per annum! Lend it, so you can get return on that investment! The only problem is that, in the ensuing credit crises (back in August), many banks had non-performing assets on their books. What's this? This means that the mortgages they held, well, the homeowners weren't making their payments on time. So, if a homeowner doesn't pay their mortgage on time, then the bank can't pay the people they owe money too, and so they have to get it elsewhere....which is where the Fed jumps in.

So, the Fed lowered the discount rate in 8/2007...old news. So what! Right? Well...they then proceeded to lower the Funds rate from 5.25% to where it currently lies at 4.5%. What's this mean? Well, this is the rate that banks charge each other for short-term, overnight loans (just like the Discount Rate, but it's a bank-to-bank loan instead of a bank-to-Fed loan). Those of you who have Home Equity Lines of Credit mortgages probably have just seen your interest rate decrease 0.75% (I would call your local bank and lock in the line of credit to a fixed rate right now because the indeces are lower).

Why did the Fed do all this? You may remember that their stance over the Summer was against inflation. Their verbage didn't even address market stability or economic balance, rather they were primarily concerned with inflation, inflation, inflation. Now, they are 90% turned to market stability and recovery.

What will happen in the near future? Look to the Fed to do a further rate cut. They've already mentioned they would likely inject a few billion into the markets to provide market balance. The DOW, NASDAQ, and S&P will continue to seesaw up and down. It's actually a great time to buy stocks, since the trend since August with the DOW seems to be that the DOW goes from the low 14K range to the upper 12K range, whiplashing upward or downward with relative predictability. I say buy it when it's in the upper 12's and sell when it hits the upper 13's--the DOW has done that twice since August.

Also, be on the lookout for foreign cash infusions. Just last week, a Middle Eastern gentleman infused Citigroup with 7.5 Billion to keep them afloat. Why? Well, it was either likely to save the money he already had invested in CITI or to snap up a bargain. In other words, look for wealthy internationals to inject more money into the marketplace to save their investments, or, rather, to snap them up for a bargain. For instance, the entire credit markets right now really don't have a clue how much their collateralized-debt-obligations are. In other words, we have billions in bad home loans and the banks just don't know how much they're worth when they post their asset values for the public eye. Someone with a good accounting brain should start a fund to snap up these 'bad loans' because some of them will certainly perform, that's the way it goes.

A Fed Rate Cut bodes poorly for inflation. But until the market has any sense of stability, which it doesn't look like it will for another 6 months at least, the Fed won't look to staving inflation. Interesting times ahead!