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FOMC Cuts Interest Rates Again

Posted by Benjamin Dona on Wednesday, April 30th, 2008 at 6:22pm.

Fed Cuts Interst RatesBy an 8-2 vote, the Federal Reserve Board's Open Market Committee cut both the Fed Funds and Discounts rates by 25 basis points this afternoon. The move lowers the Fed Funds rate to 2.00 and the Discount rate to 2.25. In lock step after the announcement, most the major banks immediately lowered the Prime rate to 5.00. In their post meeting remarks, the FOMC said that economic activity in the U.S. remains weak and the move in rates should help promote moderate growth over time. In addition, they made a point to stress that the Fed will monitor inflation and price stability closely (as some indicators of inflation continue to rise) and will adjust their stance on interest rates accordingly.

It appears the Fed is hoping that at these lower rate levels a neutral position will have been realized and that both growth and core inflation will improve in the coming months. Stocks rallied on the news while bonds basically held steady. Traders in both markets will now have to try and predict the effects the cut will have on the economy and assess their views on the outlook going forward. The key questions now are when will the rate cuts actually filter into the credit markets and whether or not the move will be enough to finally break the negativity that has held bond rates at their lofty levels. Right now, it has been a time of catch 22 for the credit markets - decreasing short term rates versus tightening credit standards. Economists and traders alike are all trying to figure out what it is going to take to break the current stalemate.

The good news is it does appear that in the last six weeks or so, things have begun to stabilize enough in the credit markets that investors are starting to feel good again about the prospect of stepping in and buying mortgage backed securities. The hope is this trend will continue and that this latest round of rate cuts will finally spur traders into more buying and thus we will see mortgage rates start to fall.

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