Huge Interest Rate Drop!
The Fed surprises with an aggressive 75 basis point inter-meeting cut in the Fed Funds target rate, bringing the policy rate down to 3.5 percent – which makes our Prime Rate 6.50% and this will have an immediate impact on HELOCs. The Fed concurrently cut the discount rate 75 basis points bringing that borrowing rate down to 4.0 percent.
The Fed is responding to an economy and financial system going into cardiac arrest. This will require emergency room style policy action from the Fed.
The timing of the cut was surely meant to help shore up investor confidence at a time with global stock markets have joined the U.S. market in pricing in an economic recession in the U.S. Signs of global investor panic have emerged with the Hang Sang equity market down 8.7 percent overnight. The global disconnect scenario, that the emerging markets will continue growing like nothing has changed while the U.S. economy wallows in recession, is rapidly unwinding. We now place about a 50 percent probability of an economic recession in the United States within the next 6 months, if not sooner.
However, the reason for the Fed rate cut had more to do with continued deterioration in the U.S. economic outlook, and the potential for further tightening of credit for consumers and businesses. Large money center banks have virtually frozen their balance sheets, reluctant to lend even to good credit. Meanwhile, consensus views on additional national home price declines over the next 12 months have risen to between 10 and 15 percent.
Bottom-line: the Fed is clearly open to further aggressive rate cuts to head off the growing downside risks to growth. The Fed’s recession concerns are now front and center. Fed funds futures this morning point to a 2.0 percent Fed funds rate by September, approximately 150 basis points lower than they are today. This is a recession call by the market. If recession can be avoided, we believe the Fed will stop short of that mark in order to keep some monetary ammunition for a rainy day. Our current view is that the Fed will cut another 75 basis points by the end of April, bringing the Fed funds target rate to 2.75.
Inflation concerns, while still in the background, appear to be more of a 2009 story and we would not rule out the possibility that the Fed will take back some of their rate cuts at that time.
This Surprise gave a small help to mortgage rate on our First Mortgages and rates dropped slightly on this news – And we will take any drop we can get, right J? We are back to being able to offer a conforming 30 year fixed rate at only 5.50% No Points!!! And Jumbo ARMS look better today too – Call me for more info.
Purchases and refys look good so take advantage of these long term rates while they are here! And have a terrific day.
Yours truly,
Gary
Gary Gottlieb
Private Mortgage Banker
Wells Fargo Home Mortgage
MAC Address A0662-030
3550 Round Barn Blvd Suite 307
Santa Rosa, Ca 95403
(707) 521-1239 Work
(707) 328-3586 Cell
(707) 540-6666 Fax
gary.gottlieb@wellsfargo.com - email
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