WARRENVILLE, Ill. -
"The 50 basis point reduction was a clear statement by the FOMC that they have some concerns about the economic impact from the mortgage market, and more specifically, adjustable rate mortgages resetting in coming months, and the residual impact-higher delinquencies, increased debt service, reduced consumer purchases, etc.-that is a direct result from the mortgage industry events," said Tom Moore, EVP of asset/liability management for Members United Corporate FCU, here, and president of Balance Sheet Solutions, LLC.
Moore wasn't alone in that sentiment.
"While a rate cut, or series of rate cuts, won't suddenly turn bad bonds into good or heal the credit crisis, it could help lift other economic activity into 2008," said Dwight Johnston, vice president of WesCorp. "I do not feel it is a one-time thing. I believe we will see further cuts, but the recent Fed actions tell me that the timing and magnitude of future rate cuts will not be as predictable as in the past."
Brad Stewart, chief investment officer for Mid-Atlantic Corporate FCU in Middletown, Pa., says there is always the possibility of future rate cuts.
"I believe the Federal Reserve means what it says and feels this was the right amount, however they are prepared to do more," he said. "They also expressed continued concern regarding the underlying fear of inflation. I don't believe, even with the current economic situation, they believe inflation is no longer a concern."
Brian Turner, manager of advisory services at Southwest Corporate in Dallas, said the Fed lowered its benchmark interest rate in hopes of "providing economic stimulus to the world's largest economy."
"The change ends a 15-month stand at 5.25% after a two-year run of increases, which lifted the overnight rate from 1%," Turner said. "The FOMC also lowered the discount rate another 50 basis points to 5.25%, a 100 basis point decline since Aug. 16, to provide psychological relief to the market and return investor confidence recently bitten by heightened credit concerns."
Policy-Makers Shift Focus
Turner noted that policy-makers shifted their focus to growth from inflation in August as rising defaults on subprime mortgages rippled through global credit markets.
"Over the past 12 months, wholesale prices rose 2.2%, matching the year-over-year increase in costs excluding food and energy," Turner said. "The August drop in wholesale prices was led by a 6.6% decline in energy costs."
But with crude oil more recently surpassing $80 per barrel, Turner said that higher energy costs could be right around the corner. "Particularly as winter approaches and heating oil demand increases," he said.
"The question persists whether a 50 basis-point drop today will provide more economic stimulus or reignite long-term inflation," Turner said.
Although surprised, Johnston was please to see the cut.
"I felt very strongly that the Fed should go 50 basis points on the cut, but I feared the stability in the stock market might convince them to go only 25," he said. "I was surprised they went 50 but felt it was very much justified."
Bob Post, vice president and chief investment officer for Corporate One Federal Credit Union in Columbus, Ohio, was also surprised by the cut.
"The 50 basis points cut was more aggressive than was generally expected," he said. "Most economists were anticipating a 25 basis point cut. Whether the Fed cuts again will likely depend on future economic data over the next six weeks. If employment data for September reveals another weak report like August's, and inflation data remains benign, then that may give the Fed room to lower rates another 25 basis points."
Post said that according to the Fed, the cut was "intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in the financial markets and to promote moderate growth over time."
Thanks to the rate cut, Johnston believes there will be a short period of relief in the credit markets, but added that he does not view this rate cut as a cure.
"I believe the next big story will be surprising economic weakness," he said.
Moore said that more anticipation of further rate cuts will drive yields lower in the short end of the curve.
"And we have started seeing the yield curve steepen as longer term rates are affected by potential future inflation concerns," he said.
