Fed orders emergency rate cut, other banks follow

from Yahoo News:

WASHINGTON - The Federal Reserve, acting in coordination with other global central banking authorities, cut a key U.S. interest rate by half a percentage point Wednesday to steady a teetering economy.

The Fed reduced its key rate from 2 percent to 1.5 percent.

In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.

Other central banks also taking part include the banks of Canada, Sweden, and Switzerland.

China also cut its key interest rates Wednesday for a second time in less than one month to stimulate slowing economic growth amid the global credit crisis.

The Fed's last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.

Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. American International International Group was thrown a financial lifeline. And, the last two investment houses — Goldman Sachs and Morgan Stanley — decided to convert themselves into commercial banks to better weather the financial storm. The number of banks that have failed this year are up sharply from last year. On Friday, Wachovia Corp. said it will be acquired by Wells Fargo & Co. wiping out Wachovia's previous plan to sell its banking operations to rival suitor Citigroup Inc.

Fed decision to lower the rate...

After Fed decision to lower the rate, I get phone calls from my clients asking me what rate they can get now. Even though mortgage companies most likely will lower rate soon, it does not happen right away, after Fed's decision, and did not happen yet.

The common question is why?

What the Fed did on Tuesday will not directly lower mortgage rates. Mortgage rates are not tied to the Fed rates, they are tied to the Treasury rates.

So the bond market is the influence over mortgage rates. When the bond market goes up – mortgage rates go down and vice versa.

Mortgage Bonds are unchanged

Mortgage Bonds are unchanged after being pressured lower yesterday. Bond Traders took some of their recent profits following an uneventful speech by Federal Reserve Chairman Ben Bernanke, as he did not give any hints about a rate cut.
Also weighing on bond prices yesterday was a strong showing in the stock market. In sessions when there has been an absence of market-moving economic news, as has happened recently, Stocks and Bonds have traded in opposite directions. Yesterday Stocks bounced back to the upside and Bonds were sold. With no major economic news to grace the airwaves again today, we could see Bond prices once again engage in a little tug of war with Stocks.
Bonds remain overbought and appear poised to follow the path of least resistance lower. However, should Stocks stumble in this lean news environment, any selling of Bonds could be tempered.

Federal Reserve Accepts Signs of Economic Slowdown - Cuts Discount Rate

In a dramatic, yet anticipated move, the Federal Reserve Board cut its discount rate by half a percent. The discount rate is the cost of money for banks and lending institutions that borrow directly from the Fed. The new rate is 5.75%.

The discount rate is different from the overnight lending rate which impacts short term mortgage rates, auto loans, credit cards and savings account rates. The Fed left the overnight lending rate steady in its last meeting August 7th.

Since that meeting the Fed has had to inject billions of dollars into the money supply to keep the overnight lending rate at 5.25%. This has been a result of banks across the country hoarding cash and diminishing the money supply. In Europe the same thing has happened with the European Central Bank injecting hundreds of billions of euros into the system.

This current activity is a direct result of fears concerning the subprime mortgage market. Buyers of collateralized loans, bundled together for trade on Wall Street as mortgage backed securities, have deep fears many of the loans may go bad. As a result no one is buying these once hot instruments and lenders are having to keep loans on their books which has decreased the amount of cash they can lend.

Right now the markets are acting on fear and speculation, not hard facts. Until the exposure to subprime and Alt-A loans fully plays out, the markets will continue to be volatile. Today's action by the Fed shows its willingness to step in and do what it can to calm the markets. Wall Street's initial reaction was a three hundred point bump to stocks after yesterday's wild ride. Over the past month the Dow has lost about a thousand points after setting a new record at 14,000.

Today's lowering of the discount rate suggests the Fed may cut the overnight lending rate at its next meeting in September. In the accompanying statement to the discount rate cut, the Fed indicated economic growth had now become a concern and it could take further action should the markets continue to decline -

In another statement, the central bank indicated that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.

Should the Fed begin to lower the overnight rate, this will be good news for borrowers, homeowners seeking a refinance and potential homeowners. Wall Street is also hoping for a rate cut to keep business flowing at its current pace.