Wednesday, January 30, 2008

Implications Of 2nd Fed Rate Cut In 2 Weeks

Wow! The Federal Reserve has now cut rates by 1 1/4% in just 2 weeks. The market has responded positively, and the market knows well that should the sub-prime crisis deepen, or the markets go astray, the fed is likely to act further. The Fed's statement left the door open for more cuts, noting continued "downside risk" to the economy. The only innuendo from the statement was that last time they used the phrase "appreciable downside risk". It remains to be seen how much of an impact these recent moves will have on mortgage rates, but at a minimum lower rates should allow banks to earn their way out of recent problems.
At this point I am starting to diverge from the conventional wisdom that we are heading for a recession. Durable goods orders reported the other day were strong, ADP payroll figures point to an increase of jobs in January on the order of 150,000, and the weak dollar is creating demand for US products. As a sum, these indicators seem to contradict the notion of an impending recession. Add to all this an exceptionally accommodating fed, a free spending congress (in an election year), and we have plenty of stimulus which makes the odds of a recession is significantly lower.

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