Rate Cuts
Federal Reserve Board

Treasuries had lost considerable ground in the last week. The oversold condition led to a healthy rebound this morning and the anticipated Fed decision provided the trigger for an additional surge this afternoon. The story on stocks was just the opposite. Following a string of gains, the indices suffered steep declines in today's trading action.

In late trading, the 10-Year Treasury Note was up by 1-16/32, lowering its yield to 3.97%; the Dow was down by 294.26 points to 13,432.77; and the Nasdaq was down by 66.60 points to 2,652.35.

As expected, the Fed cut its target for the overnight borrowing rate between banks (federal funds rate) and the rate for loans by the Fed to banks (discount rate) by 0.25% today, pushing them down to 4.25% and 4.75%, respectively.

The statement explains the action: "incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."

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There were no indications in the statement that the Fed would not cut rates again at the next policy meeting scheduled for the 29th and 30th of January. In fact, the only dissenting vote against today's decision came from Boston Fed President Eric Rosengren who wanted a deeper cut to the fed funds rate of 0.50%. (FED ANNOUNCEMENT)

The only economic release of the day provided no help for stocks as the report on wholesale inventories showed no change in October after six months of consecutive expansions. Not all of the news was bearish, however. Inventories were at a record level of leanness in October, indicating high demand for crude supplies.

But further weighing on stocks was a jump in oil futures today following two days of declines. The price of a barrel of light, sweet crude for January delivery rose by $1.18 on the New York Mercantile Exchange to settle at $89.15. By the end of stock trading, the Dow was down by 2.14%, the S&P 500 by 2.53%, and the Nasdaq by 2.45%.

The economic calendar heats up tomorrow, beginning with a couple of trade-related reports. The main one is the report on international trade for October, the first month of the fourth-quarter. In the last report, the Commerce Department said that the seasonally adjusted value of imports exceeded that of exports by $56.5 billion in September. The deficit figure was much lower than the $58.0 billion that analysts had predicted. Moreover, August's originally reported trade gap of $57.6 billion was revised to a deficit of $56.8 billion.

The deficit figures have narrowed in each of the last four report months and in five of the last six. The latest was the lowest since May of 2005. The declining value of the dollar is the primary reason. The weaker dollar makes U.S. goods cheaper to foreign buyers, thereby boosting sales.

The last report said the value of imports rose in September by 0.6% but this followed a 0.7% decline in August. Exports rose by 1.1%, the seventh consecutive increase. The value of exports was a record high and the value of imports was at its second highest monthly level.

For October, analysts foresee only a slightly wider monthly gap of about $57.0 billion.

Refinance at Today's Low Rates!

The other trade release is the report on import and export prices for November. In the last report, the Labor Department said its seasonally adjusted index of import prices rose by 1.8% in October, the largest jump since May of 2006. Forecasters had been expecting a rise of about 0.8%. The fact that September's originally reported increase of 1.0% was trimmed to 0.8% did not cushion their surprise.

As expected, the largest contributor to the increases has been from petroleum products. The index for that sector rose by 6.9% in September, the largest since last March. Yet, even excluding petroleum, prices were up by 0.5%, the biggest increase since last May. Ex-petroleum prices were down by 0.2% in September and were unchanged (0.0%) in August.

The report said that export prices were up by 0.9% last month, the largest increase since April of 1995. A large but volatile export category is agricultural products and its price index was up by 3.9% following a 4.1% increase in September. Excluding the category, prices were up by 0.5%, the largest increase in six months.

Oil prices surged last month so forecasters are looking for another jump in the overall import price index of 2.0%. This would be the largest increase since April of 2006.

Tomorrow afternoon, the Treasury will release its budget figures for last month. In November of 2006, outlays exceeded receipts by $75.6 billion. Forecasts for last month call for a slightly smaller deficit of $75.0 billion. This would bring the total for the first two months of the 2008 fiscal year to a deficit of $130.6 billion, a deeper shortfall than the $122.4 billion of the first two months of the 2007 fiscal year. Higher deficit figures are a negative for bonds since they mean the Treasury will not have to issue more debt securities (Treasuries) in the future.

source: Lion, Inc.


October 31, 2007

Fed Lowers Rate by a Quarter Point to 4.5 Percent

Mortgage Market Woes: Interest Rate Cut Again

For the second time in two months, the Federal Reserve cut the benchmark interest rate on Wednesday in attempts to stem the bleeding from a hemorrhaging housing market.

The Fed cut the federal funds rate by a quarter-point. Combined with the half-point rate cut in September, the Fed said in statement, the move “should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.”

After the cut, the federal funds rate now stands at 4.5 percent, the lowest rate since early 2006.

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This benchmark rate refers to the interest banks charge each other on overnight loans. While this may suggest the effects of the cut will be limited, the benchmark rate affects virtually all interest rates. This means that the cuts will lower borrowing costs for businesses and consumers.

The cut came despite a recent Commerce Department report that showed the economy growing at the strongest pace in more than a year, 3.9 percent annual rate in the three-month period ended Sept. 30. The Fed said that despite reports like the Commerce Department's that may show improvement, the dangers still exist for recession and inflation due to the struggling housing market and the rising number of defaults and foreclosures.

“Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.”

Many economists expect the economy to slow dramatically over the next several months, down to a growth rate below 2 percent, as a result of the lag time of the housing slump.

The effects of the rate cut were immediate and ranged from confidence inspiring to aggravating. The stock market jumped in performance. Oil prices were pushed to another record high, jumping to $94.53 a barrel. And finally the dollar sunk to a new low, reaching a record $1.4505 against the euro.

In local markets, homeowners will likely feel the effects of the cut in their mortgage payments, extending much-needed relief for many. According to the Chicago Sun-Times, the rate cut will result in a mortgage payment reduced by $200 for a $275,000 loan.

Experts say the likelihood for further cuts is now much smaller, especially since one of the Fed's voting members voted against the cut.

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