The Fed Cuts by ¼%

The Fed Cuts by ¼%

The Federal Reserve cut short term interest rates by ¼% today, which was perfectly in-line with what we had anticipated. This historic move happened at a time that many are questioning why the Fed would cut when the U.S. economy strong, the stock market is up, unemployment is near record lows, and consumer spending remains strong. The reason for this is also a history lesson. The last time the Fed started a rate cut initiative was back in October of 2007. By the time the cycle ended it was December of 2008. At that time, the stock market was falling hard, unemployment was above 7% and the U.S. economy was in a virtual free fall. Clearly, the Fed waited way too long to cut rates. Had they acted much sooner, much of the painful crisis may have been averted. At this time, the Fed can see the writing on the wall. They know that if they act now, they may be able to prolong the expansion or soften the recession when it happens. It was the right move to make. Without a cut, I believe the U.S. economy would be hit much harder when the tide turns.

 

Immediately following the cut, the mortgage bond market reacted positively, pushing bond prices to the top of the trading channel. However, the party quickly ended, and bond found themselves at the bottom of the channel very quickly after. Currently, the bond market is virtually flat. Since the impact of the rate cut had already been priced into the market, this has been a non-even for mortgage rates so far.

 

Since the Fed choose to cut by only ¼%, the stock market is in a steep sell-off. Many economists had anticipated a ½% cut, which would have been much better for the stock market. I anticipate market volatility to be high for the next few days. We will see where things settle hopefully next week.

 

Given the continued volatility, we will maintain our locking bias.