Lower Interest Rates and $800 Billion

Connecting the Headlines
Happy Early Turkey Day!
I have a lot to be thankful for this year. My wife and new baby girl are healthy and I am surrounded by family, friends and the opportunity that comes every day with living in the greatest country in the world! It can’t get any better!

Yesterday was big step forward in our economic recovery. In addition to the economic bailout passed earlier this year, the Federal Reserve and Treasury department unveiled an $800 billion plan to attempt to jump start bank lending to consumers and small businesses. The program will make $200 billion available from the Federal Reserve Bank of New York to holders of consumer debt. The Federal Reserve will also purchase up to $500 billion in mortgage backed securities (MBS.)

There are a couple of reasons for the excitement surrounding this announcement. Firstly, this is designed to work along side the bailout; not just to prevent financial companies from failing, but to get banks lending again to consumers. Secondly, since October there has been no market for MBS. Banks buy and sell MBS to help raise needed capital or invest money to achieve a return for their shareholders. When the MBS market collapsed; banks could not sell off their MBS (loans they have already made) in order to get new money to lend to customers for new loans. This is at the heart of the credit crunch. The FED will begin creating demand by purchasing MBS from the banks creating liquidity. Hopefully, this will continue to unfreeze the credit markets.

Mortgage rates responded immediately by dropping almost 0.5% yesterday bringing the current rates more in line with the Treasury Bills (T-Bills.) How long rates remain low is anyone’s guess. In the long term, rates will have to rise to compensate for the huge amount of debt that will have to be sold for the government to continue to operate and pay all these programs.

The great news is our elected and industry leaders continue to work together across party lines to try and solve the current financial mess. Another step forward to get us closer to recovery! We need to all be thankful we live in country were we have plenty of opportunity and the freedom to pursue happiness.

I hope you have a great and safe Thanksgiving.

Interest Rate Trend Forecast
Short Term (Next 20 Days) - Steady to fractionally lower interest rates
Long Term (20 days out and greater) - Lower interest rates



Sources:
http://money.cnn.com/2008/11/25/news/economy/paulson_consumer/index.htm?postversion=2008112514

http://money.cnn.com/2008/11/26/real_estate/mortgage_rates_plummet/index.htm?postversion=2008112611
Market Alert by Larry Baer