Crazy Interest Rates

The Fed has been active in brining interest rates down over the last month. This week Fed Chariman Bernake cut rates another 50 basis points.... Here is what a leading economist had to say about these cuts....

The Big Ease – But For How Long?
The Fed did not disappoint the market on Wednesday as it delivered another 50 basis point cut to its target rate. Since topping out at 5.25% in June 2006 and remaining there until September 2007, the Fed has now cut its target rate 225 basis points to the current 3%. The magnitude of the 125 basis point cut in an eight day period seems fairly unprecedented in Fed history showing that they are clearly trying to (re)act to prevent a U.S. recession.

The economic data from the week definitely shows some cause for concern – which has left the market still hoping for more in the way of cuts from the Fed. First, GDP hit a low of 0.6% in the Final Quarter of 2007 and December New Home Sales fell to their lowest point in 12 years. Non-Farm Payrolls fell 17k – their first decline since 2003 and grew by about 1 million over the past year versus 2 million the year before. But despite falling Payrolls, unemployment did not rise but fell from 5% to 4.9%. Personal Income rose 0.5% - more than the expected 0.4%. Consumer Spending was down -- off from the previous month -- but did manage to beat expectations.

With both the general economy and job growth slowing, the Fed is fiercely delivering interest rate relief to borrowers. So far, the 10-Year Treasury rate has reacted by falling along with the Fed rate cuts as investors seek safety. Some market pundits expect the yield curve to continue to steepen - meaning the difference between short and long term rates will rise. This expectation for more steepening is reflected in the Fed Funds Futures market expectations for further Fed cuts and the consensus of economists’ estimates that the 10-Year Treasury rate at year end will be above 4% (Remember, we are less than 50 basis points above the 10-Year Treasury rate 40-year low of 3.11%.) Also, debate is already taking place on just how long it will be before the Fed needs to reverse course and start raising rates – with the market now setting odds for the first rise later this year.