Feds catch us off guard

The Federal Reserve surprised many yesterday with its cut in the federal funds and discount rates. Guest blogger Barbara Van Duyn of First Priority Financial here in Folsom explains what it all means:

The long awaited Fed decision arrived with a bang yesterday!  The Federal Reserve surprised many economists and traders with a half percent cut in both the Fed Funds and Discount Rates. The stock market responded with its best performance in five years. Mortgage bonds enjoyed a sharp 41bp rally which doesn’t make a lot of sense because home loan rates are more closely tied to inflation and it’s not uncommon to see less of a reaction... or even an opposite reaction in mortgage rates. As of this posting, bonds have turn around and are now being pushed down (when bonds go down, mortgage interest rates go up). 

So what does all this mean to you?  Rates on consumer debt, car loans, and home equity lines will all benefit. The Fed cut also hurts rates of return on investments like CD and money market accounts and gives foreign investors
less incentive to invest in U.S. securities. This has sent the Dollar much lower against the currency of most foreign countries and makes foreign goods more expensive for us to buy, which adds to inflation pressures.  Overall, the Fed cut is good news for the economy but may nudge inflation a bit higher.

Traders also like what they heard in the accompanying policy statement.  The Fed provided the following statement as the rational for the cuts yesterday:  “Economic growth was moderate during the first half of the
year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.  Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote growth over time.” Traders took this to mean that the Fed will take whatever steps are necessary in terms of rate cuts to try and prevent a possible recession, so long as inflation remain in check.

Any questions? E-mail Barbara at Barbara@VanDuynGroup.com. Make it a great day!