FED Acts As Expected
Issue: 12/11/07 Tuesday
The Federal Reserve came through as expected and dropped the Fed Funds Rate by 0.25% to 4.25%, and dropped the Discount Rate also by 0.25% to 4.75%.
I love the stock market. It’s such good entertainment. The Fed did its work, and stock market players were disappointed. Equities (that means stocks) dropped 294 points on the news. Bonds moved in parallel and gave up 0.15% on the 10 year treasury. Bonds continue to be a safe haven for money that is scared out of the stock market. What’s interesting is that the bond market was below yesterday’s close from the opening bell to the Fed announcement. That means that bond market knew what the stock market was going to do, and was signaling it very loudly.
The FOMC kept its religion and acted responsibly in the face of a slowing economy while keeping its eye on inflation. Inflation is the bond market’s worst enemy.
Here is the actual FOMC statement:
“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.”
“
“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”
The market has built into its future prices an anticipation of another 0.25% cut in the Fed meetings in January and March. The Fed being noncommittal doesn’t promise anything, but leaves the door wide open for any action. Interestingly, one of the Fed members actually voted for a 0.50% rate drop; all others voted for the 0.25% drop.
Today’s news stories continue to show how bad it really is.
The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise. The government-sponsored company has already logged about $4.5 billion in projected losses during the first nine months of this year.
So thank you fellow tax payer. Freddie Mac just lost more money, and a lot of it. This is another great example of money going to “money heaven.”
Fannie Mae said they are changing their criteria for purchasing delinquent home loans they’ve guaranteed, in order to reduce the number they buy from investors. Freddie Mac announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie Mae. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home’s value. Fannie and Freddie together own or guarantee around two-fifths of
You can see the greater care being taken by Fannie and Freddie by their move to increase fees, especially on riskier loans.
H&R Block Inc., the nation’s largest tax preparer, said in a preliminary earnings report Tuesday that it expected a huge second-quarter loss as it continued to wrestle with its disintegrating mortgage arm. It said it expected a net loss of $502.3 million, or $1.55 per share, for the quarter ending Oct. 31, compared with a loss of $156.5 million, or 49 cents per share, during the same period a year ago. The majority of this loss comes from Option One Mortgage Corp which H&R Block discontinued. “We continue to move resolutely to end our participation in the sub-prime mortgage business,” Chairman Richard Breeden said in a news release.
I consider this a great example of what happens when a company moves outside of its area of expertise and chases “easy” money instead. H&R Block is known for accounting and should stick to its core business.
Here are Tuesday’s closing details:
DJ30 – 13,433 (down 294 points)
10 year US Treasury Bond – 3.99% (down 0.16%)
Euro $1.4659
Gold closed at $817 per ounce. (up $4)
Oil Closed at $90.02 (up $2.16)
Gasoline is $2.29 (up $.04)
