Fed rate cut

I don't know much about the current rate cut (intended effects, etc). However, in general i think you can take away 2 things anytime the feds change it. Here i'm going to go with the "rate cut" scenario, but you can generally reverse anything for a rate hike:

1. Borrowing will increase, as the interest on the borrowed money will be smaller than it was.
2. Savings will decrease (or more likely move into other areas, like the stock market) as the money isn't bringing in as high an ROI.

As for what this all means... lowering the interest rate encourages people not to stick their money in a bank accounts or government bonds to accrue interest. instead, it may help to drive purchases of useless junk, or investments in other areas, like the stock market. The biggest purchase many people make is their housing. When the interest rate on home mortgages lowers, people are encouraged to buy instead of saying "i'll wait till next year". If the interest rate on your mortgage drops 0.5%, and you have a $100k mortgage, you "save" a decent amount each month and each year. If you apply those "savings" towards the principle, then you come out even further ahead as you go along.

Simple scenario:
30 year, 100k mortgage, at 6%
$599.55/month
$7,194.60/year
$215,838 over the lifetime of the loan


30 year, 100k mortgage at 5.5%
$567.79/month
$6813.48/year
$204404.40 over the lifetime of the loan

So in this simple example, the borrower saved over $10,000! He could have easily doubled that (if not more) by sticking that $30 "savings" back towards the principle every month.


BTW, given the state of the housing market and the Feds rate cut, i'm going to be looking to buy within 6 months... It's a bit earlier than i had originally planned, but it's definitely worth the savings.

 

It was done to allieviate the pain at the big banks and steady the market. A short term benefit, that we'll pay for in the long term. The long term effect (higher inflation) is not going to be a good one. While immediately helping the average stock portfolio, it also immediately devalued the dollar (The loonie is now more valuable for the first time in decades). On top of that, since oil is traded in dollars, crude oil shot up to its record of $84/barrel. This was a result of the devaluation of the dollar. I foresee the fed continuing to sacrifice the value of the dollar, to keep stocks from falling until the 08 elections. The worry, is that foreign holders of dollars could get nervous and cause a flood of US dollars onto the market, crippling the value of the dollar.

This technique of trashing your homelands currency to pay for a war is exactly what Germany did after WWII to pay the reparations they were accountable for. It worked for them!

If the trend continues, we'll see $100 crude by election time, which could be a good thing if it finally removes the veil of denial from the publics eyes about our energy import problem.

 

My take on this is it is a band-aid for a bigger problem. Too many people bought houses that couldn't afford them, and as rates go up, they will lose them. The idea was to bring rates down so they could refinance and get a fixed mortgage, which they should have done in the first place (and if you can't afford a fixed mortgage, you can't afford a house!). Problem is many got 90% to 100% loans and now their house is worth less than their purchase price. These people will not be able to refinance their homes.

BTW, no blaming the federal government on this one. Mortgages are regulated at the state level.

 

A good thing about it is that people will be encouraged to spend more and stimulate the economy.
A bad thing is that investors will move their money to another country with better rates.

 

<div class='quotetop'>QUOTE(eagle33199 @ Sep 24 2007, 10:44 AM) [snapback]516914[/snapback]</div>

Ironically, mortgage rates are actually going up in response to the Fed decision because investors are worried that they're getting soft on inflation.

I only know that because my wife and I are buying a house and stalled a little bit to see which direction rates were headed after the rate cut. They've actually jumped an 1/8 to a 1/4 of a point the past week. We locked at 6.25%, but we were actually hoping for better.

 

The goal of rate changes is to moderate the ups and downs of the stock market. Cap the ups (prevent irrational exhubernace) and slow/reduce the falls (prevent market panic). But they have to act slowly and deliberately to prevent inflation/deflation effects. However, if oil rises too high, it's not going to matter. The inflation will hit hard. Or worse, world markets will switch to Euro based oil trading. This would cause trillions of dollars used now for that trade, to be dumped back on the currency change and collpase the dollar.

The USSR lost the cold war, not due to our military might, but due to their own economic stupidity. Hopefully, we are NOT headed down that road.

 

Can someone explain why this 1/2 point reduction, the first in about four years, is so bad; Yet the Feds dropping the rates to about 1.5% during Clinton's presidency was good??

 

<div class='quotetop'>QUOTE(Devil's Advocate @ Sep 24 2007, 03:05 PM) [snapback]516985[/snapback]</div>

Check your facts (you can check them here: http://www.federalreserve.gov/fomc/fundsrate.htm). The lowest they ever hit during Clinton's presidency was 3.00% (from 9/92 to 2/94). The first change after Clinton left office was a .5 reduction to 5.5%.

 

<div class='quotetop'>QUOTE(Proco @ Sep 24 2007, 12:19 PM) [snapback]516993[/snapback]</div>

Correst, just went and peered reviewd my own post and found it faulty. The lowest rate was around 2002 at 1.00%. The rates started to get cut after the tech implosion starting late in 2000.

Why is this 1/2 percent decrease so bad with inflation at just under 2%? Almost half what it was in June 2000.

 

I'm not sure this has anything to do with who was in office.
The big money players and they games they play go on regardless of who's in office.

I'm also pretty sure, people see it as good for the shortterm, bad or at least risky for the longterm. It all depends on where your money lies in labeling it as good or bad.

 

<div class='quotetop'>QUOTE(Boulder Bum @ Sep 24 2007, 01:25 PM) [snapback]516934[/snapback]</div>

The same thing happened to me. The only reason I was able to save any money is because I locked for 30 days yesterday which was 1/8 of a point better than locking for 45 days last week. Oh well. At least I can quit paying rent that goes up by 10% every year!

 

<div class='quotetop'>QUOTE(galaxee @ Sep 24 2007, 11:14 AM) [snapback]516894[/snapback]</div>

The economy is stalling in a big way, the fed cut the rate to try and have a spurt of short-term growth. The real problem in the long-term is the runaway deficits, trade and governmental.

To put the trade deficit into some perspective: I was watching Ken Burns "the War" monday night and the US spent the equivalent to 3 trillion in todays dollars over the 4+ years the US was directly involved in the war. The US trade deficit with Japan and China since 1985 equals $2.8 trillion dollars without any adjustment for inflation. And we wonder why our economy is in such tough shape?

 

Speaking of the economy, do you know many people have not filed their 2006 taxes yet because they don't have the money to pay what they owe? This means the 2006 economy was worse than we were led to believe, and the 2007 economy is even worse since those late filers still haven't been able to save enough for their '06 tax bill, and the '07 bill is lurking just around the corner.

It's hard to see the forest for the trees, so judging the economy on a personal level is hard in the moment, but when you go out a year and there are still so many stragglers from the year previous, it is easier to see the problems.

I don't envy the "winner" of the next election, since there will be so much more held-over baggage than many 'new' presidents have to deal with, like:

a war not going well
a shaky economy
a contemptuously divided nation
a lower than usual opinion of the congress
global warming ignored for so long
an oil economy held near hostage
a housing market on the verge of collapse
national debt held mostly by a nation with which we have had mixed relations

we're facing either miracles fluttering down from outer space or a bumpy ride ahead.

As for the reasons for the OP, I believe a half-point lowering interest rates is a band aid to cover up fallout from poor fiscal policy (which was itself a band aid), and this wound is so deep it will take more than a band aid to heal it.

 

Actually, it is. Plus we invade 2 countries, overthrew thier governments and have occupied them for nearly 4 years with the loss of 3,500 soldiers, (yes any loss is tragic) This type of action has never been accomplished in the history of human existance with so few military and civilian casualties.

[/quote]
a shaky economy
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a contemptuously divided nation
[/quote]

Only because half of the people (or more) don't agree with you, you call it 'divided'.

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a lower than usual opinion of the congress
[/quote]

What are you baisng that opinion. Yes Congress' opinion raiting is low, less than 1/2 that of the Presidents. Maybe Congress is doing something the people don't want and not the President!

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global warming ignored for so long
[/quote]

Its only been happening for 20-30 years, before that we were scared to death of the spectre of 'global cooling'!!!!!!!

[/quote]
an oil economy held near hostage
[/quote]

Well if we could drill for our own oil....

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a housing market on the verge of collapse
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The sub-prime sector is in collapse. It is a relatively small percentage of the market, It's just the one everyone is staring at right now.

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national debt held mostly by a nation with which we have had mixed relations
[/quote]

Japan, Germany, Great Britain???

O.K. China

 

<div class='quotetop'>QUOTE(MarinJohn @ Sep 25 2007, 12:04 PM) [snapback]517445[/snapback]</div>

The middle class is being destroyed. The middle class can't pay their bills their mortgages or their taxes as their real wages have been fairly stagnant for years. Most of the economic surge of the last ten years was paid for on credit, including home refinancing. It is a very dangerous situation for all of us.