The Fed made their decision and went as most people expected even though their decision may not be the right one. In another apparent attempt to keep the stock market content, the Fed chose to cut the Fed Funds Rate by another 50bp (.50%) bringing the rate down to 3.00%, fueling speculation of the rate dropping as low as 1.25%.
Before I get into the potential problems, let's look at the potential benefits...
- HELOCs may see a drop in their rates over the next month or two.
- Credit Cards may see drops in their rates over the next month or so.
- ARM holders should rethink their desire to switch to a fixed rate mortgage if their rates are indexed to LIBOR, and possibly other indexes as well.
- "Special financing" deals will likely continue as money is even cheaper.
Certainly some good can come of this, but remember that mortgage rates are not driven by this change directly and, in fact, will likely move higher on this news. So, let's take a look at the potential problems...
- Mortgage Rates may tick higher (not lower)
- Inflation may grow uncontrollably
- Continued devaluation of the US Dollar = less real wealth for Americans (and foreigners with currencies pegged to the dollar)
- Stagflation environment (slowing economy with rising inflation) - inflation may actually help the cooling of the economy creating larger problems
As you can see, there are some potential problems as well, some big ones at that. Since no one has a crystal ball, only time will tell, but the first test of their decision comes tomorrow with their favorite gauge on inflation, the PCE report.
Did the Fed get fooled again? What is your take?
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