The Economy Guy

Issue: 9/18/07 Tuesday

By Global Economy Guru, Tom Harvey…

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

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.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

There you have it. Those are the official words from the Federal Reserve meeting. The Fed dropped the Fed Funds rate 0.50%. Wow. There is only one way to interpret that decision. The Fed is definitely scared that we are approaching a recession. Inflation be damned, we have to protect the economy. And, it looks like they will continue dropping rates later this year.

The market went crazy and went up 336 points, warming the hearts of all those brokers on Wall St. Oil hit a new high, the US dollar went down – setting the scene for a new highs by other currencies, and Gold stayed the same which was not predicted. Reduced interest rates in the US make parking your money in other countries more attractive, and this will have the effect of decreasing the value of the dollar.

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Late summer brought no relief from soaring foreclosures. The number of homes in some stage of default jumped 36 percent month-over-month in August, according to a regular monthly survey.
Delinquencies and defaults more than doubled year over year to 243,947. The forecast is for total foreclosure filings to exceed 2 million this year. October is expected to be a peak month for hybrid adjustable rate mortgages (ARMs) to reset, with the interest rates on some $50 billion worth of loans poised to go up dramatically.

The mortgage lending crisis deepened on Tuesday, as Impac Mortgage Holdings Inc said it will quit most lending and cancel its dividend, while Accredited Home Lenders Holding Co posted a big quarterly loss and said its survival remained in doubt. The developments came a day after another struggling lender, NovaStar Financial Inc , gave up its real estate investment trust status sooner than expected because it could not pay a $157 million dividend to keep it. “Given the severe dislocation of the marketplace, which included unprecedented margin calls, we are left with no other alternative but to downsize our company to better operate and navigate through this difficult and unrelenting environment,” said Chief Executive Joseph Tomkinson. Impac also said it has sold $900 million of mortgages since August 1, but has found it “extremely difficult” to sell more, and is working with its own lenders to find ways to do so.

The core mortgage industry is still getting killed. The market is exacting its predictable price for creating this mess in the first place.

Here are Today’s closing details:

DJ30 – 13,739 (up 336 points, or 2.51%)

10 year US Treasury Bond – 4.48% (Up .01)

US Dollar - $1.3974/Euro. The dollar fell on the news from the Fed.

Gold closed at $724 per ounce. No change.

Oil Closed at $81.51 (Up 0.94) A new high today.

Gasoline is $2.06 (Up 0.02) Gasoline hasn’t followed Oil as drivers slow down for the Fall season.