Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – September 25th, 2007

Fed Trying to Prevent Recession

Can The Fed Prevent A Recession?

Last week I had mentioned the lowering of the Federal Reserve’s overnight rate by 0.5% and the effect that it would have on the markets.  I indicated that, “Our advice here would be to see how far the initial reaction will go…lock when traders realize that this is not really good for bonds…”  So when the Fed did this on Tuesday, interest rates reacted quite favorably with bonds moving upward forty-one basis points.  But how short-lived this was…as predicted, bonds started heading in the opposite direction as soon as the very next day!  First, here’s what the Fed had to say about their cuts; “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 moderate growth over time.” 

In Short…

In other words, the Fed will take whatever precautions necessary to try and prevent a recession, as long as inflation is kept at bay. 

The biggest concern, here, is this:  The dollar is at its weakest point against the Euro and current at the same value as the Canadian Dollar.  This puts inflationary pressure on the United States, because imports will now be more expensive to purchase.  Remember that inflation is interest rates worst enemy! 

I Predicted Correctly!

Interest rates reacted exactly as in last week’s prediction…our locking advice was strategically precise.  We have also moved, again, below that darn 200-day moving average.  For so long it acted as a level of resistance to better interest rates.  Then we finally moved above it for about a weak and half, and again…we’ve managed to plunge below it.  But keep in mind that conforming interest rates are still at excellent levels with APR’s below 6.5%.  And with Friday’s release of the Fed’s Favorite gauge on inflation, the Core Personal Consumption Expenditure Index, let’s hope that we see inflation in check. 

FHA Reform Bill

Remember when I was talking about the government getting involved with the credit crisis?  Well the House just passed the comprehensive FHA reform bill.  This will still has to go through the Senate, however, it would do a number of things, including enabling lower down payments and increasing the loan amount the FHA loans will insure.  Currently, the FHA loan limit in our area is $304,000.  That means that the Federal Government will insure a certain percentage of a loan to a lender.  Hence, the loan could be sold in the secondary market with some guarantees.  By raising the loan limit to $417,000 it would assist in this liquidity crisis by enabling more loans to be sold.

So, we’re watching the 200-day moving average closely, and most of the economic information will be release this week, after I write this article.  So, let’s see what happens throughout the week and I’ll report it to you then… Until next week…