The Fed and Interest Rates

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Dec 17, 2008 12:19 pm

What are your guys' thoughts about what the Fed has done with their 0-.25% rate policy?

 
I've read articles on both sides of the this issue and not sure where to stand on this.  What happens to the dollar?  Will money move to riskier investments?  How will this impact inflation...and how long will it take to be noticed?
 
I've got clients' emergency money sitting in money market funds, but at 1% (as of yesterday), what good does it do?
 
I see the opportunity for fixed annuities averaging just north of 5% right now as an option for CD buyers, don't get me wrong about that.
 
I don't see people accepting 1% on their money for long and they won't be happy with renewing their CD's at such low interest rates.
Dec 17, 2008 12:37 pm

SNags, good question.

 
Personally, I am more curious to see how the consumer and small businesses will react. Interest rates, inflation, the dollar, CD rates etc. can do what they want, but if no one goes out there to refinance, take out a new loan, expand, hire new employees, buy equities,etc it won't matter. People are still struggling. At this point I would not underestimate the American People's ability to simply not care or lift a finger. $1.5/gallon gas hasn't changed anything (yet), why would a drop in interest rates do it?
 
That's the problem with today's economy and market that is so contingent on psychology and perception. Nobody was doing anything yesterday; I doubt this helps that, not in the fireseeable future at least. I don't think we'll know the effect of the rate drop until May comes around.
Dec 17, 2008 12:45 pm

I just locked in our new home at 30 yr for 4.5%.  The loan officer has been on the phone all morning with people wanting to refinance.   FYI

Dec 17, 2008 12:49 pm
anabuhabkuss:

SNags, good question.

 
Personally, I am more curious to see how the consumer and small businesses will react. Interest rates, inflation, the dollar, CD rates etc. can do what they want, but if no one goes out there to refinance, take out a new loan, expand, hire new employees, buy equities,etc it won't matter. People are still struggling. At this point I would not underestimate the American People's ability to simply not care or lift a finger. $1.5/gallon gas hasn't changed anything (yet), why would a drop in interest rates do it?
 
That's the problem with today's economy and market that is so contingent on psychology and perception. Nobody was doing anything yesterday; I doubt this helps that, not in the fireseeable future at least. I don't think we'll know the effect of the rate drop until May comes around.
 
I don't know about that.  I think the cheaper gas does help people, but it's not flashing neon signs.  I have a 2 door coupe.  I was paying $50 to fill it up.  Now I pay less than $30.  Multiply this out, and there has to be some effect.
 
I think the psychology aspect is more about people not wanting to take risk.  That may be why they have the deer in the headlights look...because they think anything more than money market or CD's is too risky.  Once the media stops scaring the hell out of people, they might realize that big institutions probably won't fail like they were and that their money is safe with them.  This will take time for them to figure it out though.
 
I do think that if mortgage rates get down to 3.5-4.5% people will be lining up to refi or buy houses (legitimately).  The problem is, do they have enough equity in their house to refi or will they have to put more money up? 
 
If money does move out of treasuries and into corporate bonds, it can get the commercial paper market going and also fuel corporate equity investments.
 
Let's not forget inflation is the government's friend in this, too.
Dec 17, 2008 1:32 pm
jkl1v1n6:

I just locked in our new home at 30 yr for 4.5%.  The loan officer has been on the phone all morning with people wanting to refinance.   FYI

 
Who the hell wrote a fixed 30-yr. mortgage at 4.5%???  What'd you pay, 3 points?  I haven't seen 4.5% on a fixed 30.  I haven't even seen that on a fixed 15.
Dec 17, 2008 2:22 pm
B24:
jkl1v1n6:

I just locked in our new home at 30 yr for 4.5%.  The loan officer has been on the phone all morning with people wanting to refinance.   FYI

 
Who the hell wrote a fixed 30-yr. mortgage at 4.5%???  What'd you pay, 3 points?  I haven't seen 4.5% on a fixed 30.  I haven't even seen that on a fixed 15.



My credit union is quoting 4.625% today for 30 yr fixed.

Dec 17, 2008 2:27 pm

The bigger question in my mind is how does a financial institution make money on a mortgage issued at such a low rate?  Right now their cost of funds from the government is low, but it won't stay that way forever....

Dec 17, 2008 2:29 pm

Check on it today.  Yesterday they were 5% where I am located, today at 4.5%.  Midwestern local bank.  One of the bene's of working at a bank is no to low fees.  Yes I have to pay a little, right at a quarter of a percent, I could've not paid and had a 4.75% rate.    

Dec 17, 2008 2:34 pm
HymanRoth:

The bigger question in my mind is how does a financial institution make money on a mortgage issued at such a low rate?  Right now their cost of funds from the government is low, but it won't stay that way forever....

 
THAT is the question!  I know let's bundle all these mortgages, we'll call them asset pools or collateralized debt/mortgage obligations or something.  Then let's sell them as investments!  Somebody will buy these!
Dec 17, 2008 2:35 pm
jkl1v1n6:
HymanRoth:

The bigger question in my mind is how does a financial institution make money on a mortgage issued at such a low rate?  Right now their cost of funds from the government is low, but it won't stay that way forever....

 
THAT is the question!  I know let's bundle all these mortgages, we'll call them asset pools or collateralized debt/mortgage obligations or something.  Then let's sell them as investments!  Somebody will buy these!
 
Should we also sell insurance on these "asset pools" to everyone because we know they won't default?
Dec 17, 2008 2:42 pm

Great Idea.  While we're at it we should all start a, oh, what should we call it?    A...a...I know, an Investment Bank, we could start a whole industry with this idea. 

Dec 17, 2008 10:56 pm

Google "Quantitative Easing"

Dec 18, 2008 10:54 am

Damn, the credit union my wife is at is offering us 4.7. We're currently locked in at 6.1

 
We're going for it, today. Thankfully, because she is an employee, she gets priority.
Dec 18, 2008 11:07 am

FYI....I just talked to our loan officer and rates have popped up to 5.6% today.  He has no idea of what's going on in mortgage rate market.  He's frazzled.  My reply: "Welcome to my world"

Dec 18, 2008 12:13 pm

Got it at 4.8

 
Saves us almost $400 a month. Happy days.
 
EDIT: scratch that. $620 a month!
Dec 18, 2008 4:53 pm

Congrats!  Helluva rate! 

 
Dec 19, 2008 4:21 pm
snaggletooth:

What are your guys' thoughts about what the Fed has done with their 0-.25% rate policy?

 
I've read articles on both sides of the this issue and not sure where to stand on this.  What happens to the dollar?  Will money move to riskier investments?  How will this impact inflation...and how long will it take to be noticed?
 
I've got clients' emergency money sitting in money market funds, but at 1% (as of yesterday), what good does it do?
 
I see the opportunity for fixed annuities averaging just north of 5% right now as an option for CD buyers, don't get me wrong about that.
 
I don't see people accepting 1% on their money for long and they won't be happy with renewing their CD's at such low interest rates.



According to my crystal ball, if discount rates are lowered, borrowing should be encouraged, money supply expands, and interest rates decrease.  With low interest rates, foreign investment decreases, foreign investors sell USD, USD weakens, and imports to US decrease while exports increase.  Also, price of existing bonds increase and current yield decreases, thus existing bonds will be sold at a premium.