Fed Week was surrounded with a full-scale shift of funds from Mortgage-Backed Securities (MBS) into the stock market and elsewhere and with it we saw quite a negative move in bonds and rates. But it seemed to find a floor after the announcement with a bounce favorable that continues into today. As I mentioned in my News Flash on the announcement day, this is different from recent Fed rate changes in that the drop in rate didn't have a negative (opposite) effect on mortgage rates that are long-term and all about inflation. Why not? The Fed announcement wording reiterated what we have seen for the past month - Inflation appears to be in check, for now.
I've had a couple of questions about inflation recently. Just two months ago, there was great fear of inflation and now the talk is about a deflationary cycle - seems odd doesn't it? It appears the quick reversal of threatening inflation is all about the economic downturn we are well into. It is appropriate to be calling it a recession with Q3 GDP coming in negative (though not quite as bad as expected), and Q4 well underway in negative territory. The downdraft has caused a real drop in demand for many products. Oil is the most visible with pricing don into the low $60s after hitting a high of $147+/bbl on 7/11/08. Global demand for oil is off fully 20% in the past month from those highs. OPEC has responded with a cutback in production, but I am told this will only stabilize oil prices and not send them back up. Demand for commodities and products across the board shrivel as the global expansion skids to a halt. Central Banks worldwide are dropping rates at the same time the US is, so the normal weakening effect on our currency from our rate drop is almost nil. In fact, Japan's equivalent rate to our Fed Funds rate is now at 0.3%. Expectation is that ours (now at 1.0% and prime at 4.0%) will drop again by the December 16th FOMC meeting by as much as another ½%.
This week has news on jobs and wages, Tues, Thurs, and Friday. Check out the forecasts below and the video feature on comparing automobile leasing to buying. Tell me what you think of this new feature. Make it a great week, and turn to us for answers and financial services that get deals done! -Dave
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