In our last episode (newsletter), we find our hero (me) saying:
 
‘Wall Street bloodhounds are sniffing around for an emergency rate cut from the Fed.  I don’t see it happening.  Emergency cuts evidence panic from the higher-ups, and maintaining a veneer of confidence is more important than ever.  If the investing populace isn’t convinced that the Federal Reserve has a handle on price stability and growth, mob mentality will set in and bad things will result.’
 
Boy, I suppose my assumption that the Fed had some backbone was dead wrong.
 
On the evening of Martin Luther King Jr. Day, the Federal Reserve had an emergency meeting where they agreed to drop the target for the Fed Funds Rate ¾ of a point to 3.5%.  This came on the coattails of multiple global markets taking huge losses (the biggest since 9/11/01) on the speculation of an American recession.  The huge rate cut must be the type of thing Ben Bernanke was alluding to when he said that he was poised to take ‘substantive additional action’ to prevent downside risks from manifesting.
 
We are slowing economically and some money loosening is needed, no doubt.  But this move is reminiscent of a media-bloated hypochondriac crying wolf as the whole world listens.  Not good.
 
And that ‘bad things will result’ I had mentioned seems to have just begun.  The markets opened significantly lower today.  The Dow Jones Industrial Average dipped 464 points at its lowest trough before recovering most of its losses, ending a hair over 128 in the red.  This stands as an­other big heap of volatility thrown into this market to further exacerbate problems.  When inves­tors get spooked from overly volatile activity, they run away from the stock market and hide in fixed-income instruments to hedge against big swings in their portfolios.
 
Guys, I know we’re all happy-go-lucky that these rate cuts will create jobs, improve mortgage rates, and increase payrolls more rapidly.  I’m a direct beneficiary of another boom in refinances, which we could be headed towards by mid ’08.  However, the dollar cannot handle too much more pressure.  Cutting key interest rates further undermines the value of our already ailing currency by pumping more money into the economy.  That will spell inflation on the long-term, economic slowdown or not, forcing the Fed into a money tightening cycle more quickly than anyone would prefer.
 
I am profoundly disappointed that the Fed couldn’t show the poise enough to even wait a WEEK to make a rate cut at a pre-scheduled Open Market Committee meeting.  I’m not against the con­cept of the cut, or even the magnitude of the cut, but it should have been spread out a bit more to allow the markets the chance to find their natural levels.  On top of this robust cut, expect more rate cuts at the regularly scheduled meeting at the end of the month.  The housing crisis and tight lending standards are big deals, don’t get me wrong.  But maintaining a strong dollar trumps the housing market any day of the week.  And when push comes to shove, the value of the dollar will become the central issue sooner or later if they continue down this cutting path.
 
However, the time may be sooner than we expected to catch low fixed rates on a refinance.  If inflation gets out of hand, mortgage rates will become more expensive no matter WHAT the Fed does.  My suggestion is, if you’re looking to buy or refinance any time in the next 12 months, you may want to get your ducks in a row pretty darn quick.  The window of opportunity that Ben is opening for us to catch these great rates is going to be shorter than the big window Greenspan gave us back in ’04-’05.
 
Straight from the press release this morning:  “Incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.  The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation develop­ments carefully.”  Monitor inflation like a starving hawk monitors a mouse would be more like it.
 
This bubble economy we’re coming out of ensured that a slowdown would happen.  We can cut and stave it off in the short-run, but eventually we’ll have to pay the piper.  But hey, let’s enjoy the loosening while we have it.  The recent rate cuts combined with a fiscal stimulus package (estimated between 1.5-2 billion dollars worth to the taxpayers) means we have some spending to do in the nearby future.