Does it really surprise anybody that Ben Bernanke and his merry band of financial wizs over at the Federal Open Market Committee went extreme last week, taking its benchmark Federal Funds Rate to an all-time low of practically zero?
Something had to be done. And the current economic climate is a no-win situation for many Americans, given the increasing numbers of job losses and bankruptcy filings. So it makes the need for some further action by the Fed really a no-brainer for all intents and purposes.
Well, at least they’ve come up with something new and different this time. Instead of giving a definite point reduction, the Fed settled on establishing a first-ever “target range” of between zero and 0.25 percent.
A range? What does that really mean? Is the Federal Reserve as dumbfounded about what’s going on with the nation’s economy as the rest of us at this point? That’s what Realtors are doing nowadays when it comes to pricing property for sale. Instead of setting a definite price, they’re publishing a price range within which the seller will consider offers.
In these uncertain economic times it leaves room for a little flexibility. Maybe that’s what the Fed is looking for this time…a little wiggle room. Or maybe they just don’t want to commit to a definite number but would rather wait and see, once again, how things go.
A look at the Fed’s longer than usual official statement this time does not instill a lot of confidence either. In fact it shows a fair amount of skepticism for the first time when the FOMC comes out and says, “the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
Besides telling us what we already know about job losses, declines in consumer spending, and an overall weak outlook for economic activity, the Committee is regurgitating its long-time forecast for further moderation in inflation in coming quarters.
The Labor Department just came out with its latest report showing consumer prices falling for the second consecutive month at the fastest rate on record since 1947, according to CNNMoney. It appears that inflation is indeed moderating, and to some extent the pendulum may be swinging too far in the other direction to the point of price deflation.
None of this is likely to have a lasting effect on the flow of foreclosures, however.
Even if mortgages rates do decline as a result, who’s going to be able to take advantage of them? The banks that are supposed to be stimulating the economy right now are hoarding the funds they’re receiving from the Treasury Department as part of the $700 billion bailout. They’re not lending the money like originally intended. And few people are qualifying for loans anyway given the high standards now set by the lending industry.
The Fed says it’s going to stimulate the economy by buying large quantities of agency debt and mortgage-backed securities. Plus finding other ways of using its balance sheet to further support credit markets and economic activity. Of course they’re doing this with taxpayer money in addition to the $700 billion already appropriated to do the same thing.
So how is this going to benefit anyone? The rate reduction may spur a brief onslaught of refinancings. Even then, in order to refinance a borrower has to qualify for a loan, and lenders aren’t so fast to dole out the funds right now.
Real estate investors who want to buy and flip foreclosures are having a tough time arranging financing for their potential buyers, no matter how good the deal is for the buyer. Buyers themselves are having little luck on their own obtaining financing. It’s a good thing that successful long-time investors have established relationships with private sources of funds or hard money lenders so they can continue to purchase properties. At least they can always buy and hold and cashflow the property at an appropriate rental rate.
So who really stands to benefit from this latest drop in rates by the Fed, if anyone?
Bernanke has job security until January 2010. Will the Obama Administration make a change at that time? Should they?
We’d like to know what you think!