YAHOO!! Rates are going down!!!  We'll aren't they? 

Simple question but it has a complex answer, and one I've already been asked twice today.  My answer to their question wasn't totally what they expected.  The answer is "NO" today's federal reserve cut does not mean long term rates are going anywhere at this point.  But it could signal future reductions and it could be the catalyst that starts the recovery to our impending recession.

Here is an easy way to look at it.  A movie that most of us have seen is a good example of this process.  In the "Titanic" the ship is moving through the smooth sea's at a fairly high rate of speed for a ship of it's mass.  The lookout see's an iceberg in the distance.  He then alerts the helmsmen who then frantically turns the ship.  The engine room also reacts quickly, but the ship is so large that it takes to long to actually turn away from the impending iceberg.  So the ship impacts partially with the iceberg and sinks.  

The economy is much like the iceberg.  In 2001-2003 Greenspan cut rates drastically but consistently each month.  The economy gradually picked up steam and began to hum along.  Then in 2003 Greenspan became worried about inflation and the fed raised rates 17 times in a 2 year span of time.  The problem is that he may have reduced rates to much during that 2001-2003 time span, and he may have increased rates tooften during the next economic phase.  Now Bernake is being accused by some experts of reacting to slowly to the mortgage meltdown.

So what does this recent change mean.  Maybe not allot if it's not followed by future rate cuts.  Or it may be to late, perhaps we're already headed right into the iceberg!  At this point I'm hoping the engine room (the government) and others jump into the fray.  Right now we need immediate action in terms of raising FHA limits.  The new FHA-Secure loans are yet to be employed in the effort to bail out these large banks.  So the long term impact of todays rate cut are far from being known.

So what are rates going to do tomorrow.  Probably not much.  We may see a reduction in long term rates of a 1/4 to 1/2 a point over the next few weeks, unless of course Oil prices continue to skyrocket, or if we see strong signs of inflation.  The other factor is if Wall Street thinks the mortgage crisis is over, then you may see allot of cash move from bonds back to the market, which will drive up the yield.

So I wouldn't be to excited yet about the rate cut.  If you have a second mortgage or variable rate tied into treasuries, then maybe you will see a small decrease in your payment.  One area that this rate cut may help is with the large banks.  Right now these banks are holding tight any liquid funds they may available to lend out as mortgages.  The perception among the banks maybe that the liquidity crisis is abating, and therefore it might be a good time to inject that money back into the market.  The way you can tell is by watching Mortgage Backed Securities.  Unfortunately it's going to take more then one rate cut to stem the bleeding. Foreclosures continue to rise, real estate prices are still going to settle between now and the end of 2008.  So there is allot of rough weather ahead.  I just hope Bernake didn't pull the trigger to late in regards to interest rates cuts, and I hope the Republicans and Democrats quickly move on recent changes to FHA limits.  The next 6 months will tell us if the iceberg was a small one or large one!