Another 75! Markets Move Higher
March 19th, 2008 Categories: Mortgage News
Our relentless Mortgage expert Doug Fujikawa brings us up to date on the newest news on the Fed’s recent three quarter point rate cut…
In dramatic fashion the Federal Reserve lowered short term interest rates 75 basis points. This puts the Fed Funds rate at 2.25% and the Discount Rate to 2.50%, levels we have not seen since 2004!
The stock market reacted favorably to news and the Dow finished up 420 points to 12,392.66. Positive earnings from Goldman Sachs and Lehman Brothers also helped to propel the market higher.
With constant inflation pressures like the release of today’s Producer Price Index, the Feds have to be very careful with how they handle this slowdown. The Fed’s main concern appears to be to reinstate stability and confidence in the credit and financial markets and to avoid a potential recession.
That being said, inflation is not the number one concern for the Feds. The Federal Reserve released this statement…“Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.” With investor confidence at an all time low and fear at an all time high, this proactive position that the Federal Reserve has taken is sure to offer some relief.
On the interest rate landscape, we continue to see greater spreads between conforming and jumbo financing. In years past there has been a historical spread of .50% between the conforming and jumbo rates. During the boom years of 2003 to 2005 the spread narrowed to as little as .125% between conforming and jumbo rates. Currently, the interest rate spread is over 1.75% between conforming and jumbo rates. What it means is that if conforming 30 year fixed rates are at 5.75%, then jumbo 30 year fixed rates sit around 7.50%!
This is a sign of a non-liquid market, something the Feds are trying to fix. By making credit more readily available and less expensive, you in theory provide more liquidity and therefore a more efficient market for mortgage backed securities to trade in. Meaning, easier or cheaper lending rates encourage borrowing and therefore increase the number of able buyers for a certain commodity; in this case mortgages.
