“Your big opportunity may be right where you are now.” -Napoleon Hill
Fed Boost Could Be Just what the Dr. Ordered!
After months of questionable interest rate cuts, the Federal Reserve made a move today that could set the U.S. economy straight and help take its equity market off of life support. And that it - did just by its very announcement - as the Dow experienced its highest daily point gain since July 29, 2002.
The aforementioned “move” is a $200 billion relief program that will inject extremely safe Treasury securities into U.S. banks for a number of collateral options. For the record, some of these options include the very mortgage-backed securities that sent our economy into its recent down spin.
What a way to quell investor worries of a “slow as cold molasses” credit market born from billions of dollars worth of write-offs by banks trying to free themselves of bad mortgage-based securities?
Investment strategist David Kovacs from Turner Investment partners couldn’t have put it better in a New York Times quote today when he stated “For the first time, the Fed now is doing the relevant work. This is a move by the Fed that has teeth to it.”
I’ve been a firm believer that although the US consumer needs to get a better grip on their finances, retarded lending policies, particularly in the mortgage arena, have largely caused the recent economic downturn. With the Fed set to amend the problem, we could be shaping up for a market upturn over the next few months, especially if today’s activity is any indicator.
The dollar also made gains on every major international currency today in what I take as a massive vote of confidence in the new plan. Very good to see after the past few weeks or “touch and go” trading.
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The question is not whether or not the U.S. Federal Reserve Bank will cut its benchmark lending rate today, but if in fact the cut will have any impact on our wounded economy.
Whether the cut is .25 or .75 points – either of which would bring the rate to an all-time low, economists fear that the benefits simply won’t trickle down the consumer. Recent rate cuts have done nothing to boost the consumer credit market because given current economic conditions, the banks that aren’t going under find that issuing consumer loans at anything else than a premium is far too risky.
A great example of this is the current market for auto loans. Typically influenced by the prime rate, which was roughly 4%, Monday, the interest for a 48-month new car loan is 6.8%.
With Americans now hoarding their money and growing increasingly content with simply not losing their hard-earned greenbacks, the Fed may need to expend some of its “extra ammunition” in addition to its imminent rate cut to get consumers to start spending again.
So, what happens when the rate hits zero and its back to the drawing board for Big Ben and his crew? Here’s a great report written by Ben Bernanke himself on potential strategies for monetary policy when the key rate hits zero.
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