In a move that has become familiar news since last September, the Federal Open Market Committee voted this week to lower its target for the federal funds rate to 2%, as well as decrease the discount rate to 2.25%. But this time, it seems, whether from a desire to refocus its assistance on other facets of the weakening economy or a decision that one can only go so low on the interest-rate scale, the Fed is done with rate-cutting for at least some time.
‘The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity,’ the committee stated. This wording indicated to many that barring an extreme market calamity, this announcement is the last of its type that we can expect to hear for a while.
Furthermore, unlike earlier statements accompanying these economy-jolting measures, the Fed's recent statement did not refer to ‘downside risks’ to the economy and its need to react to those risks in a ‘timely manner.’ This deliberate omission also signals a pause in reducing rates, noted an April 30 New York Times article.
With that pause, there is some time for analysis: Given that the Fed's statement pointed out that the ‘deepening housing contraction’ is ‘likely to weigh on economic growth over the next few quarters,’ is this the antidote – or at least a part of it?
More specifically, what have these rate cuts done, particularly for cash-strapped consumers and those mortgages – whether current or sought – that have become the most severe cause of financial distress for many? The quick answer seems to be ‘not much.’ Or, to be more fair, ‘it depends.’
Regarding any sort of loan, ‘Tame your expectations,’ warned a CNNMoney article. ‘Given all the turmoil in the credit industry, it's likely your interest rate is the same or perhaps even higher.’ HELOC-holding homeowners, however, might have a little more reason to smile.
Of course, adjustable-rate mortgages (ARMs) will adjust in a borrower-friendly direction at their reset periods, though existing borrowers are likely to benefit more than prospective borrowers, explained Peter Cohan in a BloggingStocks.com article. The 5/1 ARM, for example, currently averages 5.58% after being at 5.91% in April 2007 – indicating that ‘the Fed's interest rate cuts have not had that much of an effect on mortgage rates for those seeking a new mortgage,’ he stated.
To some, the most recent rate cut was already more than one cut too many: The Wall Street Journal, for example, strongly criticized the move even before its announcement.
An April 28 article likened the Fed's pattern of slashing the interest rate to an addiction, and this most recent move to that last binge before a promised period of restraint. ‘What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous,’ the editorial stated.
Instead, the piece – titled ‘The Fed's Bender’ – encouraged corrective actions focused on specific troubled elements of the banking system, such as rights offerings, dividend cuts, new management and even public money through the Federal Deposit Insurance Corp. if needed.
‘That is the kind of targeted liquidity that helps the financial system handle fears of bank failure and solvency without risking inflationary side effects,’ the article explained, noting that recent financial progress is primarily owed to such Fed actions as lending to investment banks after the Bear Stearns rescue.
– Jessica Lillian, Commercial Mortgage Insight
