A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.
The markets continued their gut wrenching swings today before finally falling down into the red following a huge rally yesterday in which the Dow gained hundreds of points. For it?s part, the Fed came out today and took some drastic measures of it?s own. It cut a short-term interest rate by a half-percentage point, while at the same time issuing a rather doom and gloom outlook for the economy in the near future. This doesn?t seem all that surprising, given that unemployment remains high, consumer confidence remains low, and the ongoing tightness of the credit markets despite hundreds of billions of dollars being pumped into the system.
The cut itself put the federal funds rate at one percent, which matches the lowest level for the overnight bank lending rate?ever. Of course it wasn?t all that long ago that the Fed took a similar action, the last time being June 2003 and 2004. If the market sentiment for today is any indication, we can take the rate cut?s impact as ?meh.?
In their own ?how low can you go? game, investors were hoping for the largest cut ever, and some were even hoping the Fed would go for a three quarters of a point cut, putting it at 0.75 percent. No dice there. The cut does have an impact on a variety of loans, however, and that includes home equity lines, credit cards, and of course business loans. As to how it relates to the housing market, being able to take out home equity lines at a lower rate is a significant development. With the cut, the hope is (no one speaks with certainty these days) that the bringing the rate this low will spur economic activity. This is particularly important since the holiday season is around the corner and there?s been a rather steep drop off in consumer and business spending thanks to the credit markets tightening up so much. Something tells me Santa?s going to need to cut out some elf laborers to make the numbers.
Of course, we?ll get a better view of just how badly the economy is going tomorrow morning. The Commerce Department will issue it?s reading on the nation?s gross domestic product for the third quarter. No one is expecting anything good from that, with economists believing a negative GDP number to be a likely scenario. If that?s the case, it would be only the fifth quarter in about 17 years to bring in that kind of bad news.Click to See the Latest Mortgage Rates»