Posted by Chris on 16. December 2008 06:43
The Fed today announced that it is cutting the Fed Funds Rate, the rate that banks charge each other for funds, from 1% to a range of 0% to 0.25%. These are truly uncharted waters, at least in our lifetime.
In a statement released just minutes ago, the Federal Open Market Committee (FOMC) stated "Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further." The market reacted favorably to the news. The Dow Jones Industrial Average reacted with a quick 60 point gain and is currently up 175 points (2%).
With the lowering of the Fed Funds rate to essentially nothing, the Fed is now seeking other tools to help stabilize markets. In this morning's release, they indicated that in order to help stability the real estate market, the fed will commence purchasing large quantities of agency debt and mortgage-backed securities. There was also a suggestion that they may begin purchasing long term Treasury securities, which will help drive rates down. The Fed has not been shy communicating their desire to get mortgage rates to 4% or lower. Now we know how they will do it. I expect that as the Fed implements these strategies, rates will begin to fall further, leading to a flurry of refinances in the 1st or 2nd Quarter of 2009.
Full text of the Fed's release: