Following a reading of the Federal Reserve Central Board meeting minutes from January, analysts are pricing a likely rate cut as high as .5 basis points into the financial markets.  Discussion during the meeting suggests the Fed intends to remain aggressive in its moves to combat the struggling economy.

Supported by yesterday’s indication that inflation, while high, may not be out of control, the markets seem to believe the Board is going to keep its focus on doing what is necessary to stimulate the economy.  There had been growing concern, of late, that continued cuts could contribute to already high inflation.

In spite of the hopes for more rate cuts, equities markets were unsettled today (February 21) with the economy still showing signs of slowing.  Leading economic indicators dropped for the fourth time in a row.  The Philly Fed report showed manufacturing is slowing.  The Fed also seem convinced the economy faces a challenging near-term.

While the Fed has been aggressive at cutting rates in the last few months, it often takes several months for the cuts to impact indicators examined by financial markets.  In other words, it will be a while before Americans will know if the sequence of Fed cuts has improved the US economy.

The Fed meets again on March 18 and it is likely housing and credit markets will remain key topics for discussion.  A couple key Fed members recently suggested that inflation pressure might inhibit much more in the way of rate cuts.  However, the majority of Board members appear convicted to get the economy going in spited of the concerns.  While inflation readings have been a bit higher than ideal, recent readings show that things are not getting out of hand to the point that the Fed may switch gears.

While oil futures dropped back below $100 in today’s New York trade, all indications are that gasoline prices will reach new heights within a few months.  Other consumer prices have been impacted by inflation as well.  Upward price pressure in key consumer areas has been largely impacted by the weak dollar and reliance on foreign supply of many goods and services.  Consumer foods, electronics, and other markets could be impacted, especially for imports from stronger currency markets.

In spite of the likelihood of continued Fed rate cuts, mortgage rates have been on a strong upward move as of late.  The 30-year fixed average, according to Bankrate.com, climbed back over 6% today, with a reading of 6.01%.  This is up from a 5.64% average from last week, and a low point of around 5.125% just a few weeks ago.  Some leading banks, like Wells Fargo, have had rates posted between 6.25-6.375% the last couple days.

Mortgage rates already seem to have reached a bottom as expectations for additional cuts have likely been priced in.  While standard variable rate loans and credit cards continue to fall with base rate cuts, some home owners are concerned they waited to long to take advantage of rate cut bottoms. 

Home equity loans may be more likely to see more benefits with additional cuts.  January home equity APRs continued a trend of steady declines, as rates reached their lowest point in two years.  Many banks have posted rates in the low-to-mid 6% range for excellent credit borrowers.  This means good credit borrowers can borrow equity from their home at rates comparable to their mortgages.

Americans remain concerned about the impact on their day-to-day lives from the struggling economy.  Many have lost their properties with record foreclosures.  Others are struggling to pay bills and buy groceries.  Approval ratings for President Bush and Congress have hovered near historic lows.  While consumer confidence has been shaky, consumers have been somewhat resilient with their sentiments.  Many remain hopeful that the Fed and government are committed to preventing the economy from experience a deep, and drawn out recession.

Market Recap

Equities reversed in a good way for investors on Wednesday.  After an initial drop at the open, the Dow managed to close up 90 points, while the NASDAQ and S&P had 20 and 11 point gains, respectively.  The key note of the day was the Fed lowering its overall economic outlook.  While markets reacted negatively early on, they soon realized there were not any great surprised in the report.  In fact, moderate inflation fears encourage investors concerned about inflation getting out of control.  Consumer priced jumped again.  Thursday it was announced that jobless claims dropped by 9,000 last week.  Leading economic indicators fell, supporting the notion of a slowing economy.  The Philly Fed reading also showed a drop in manufacturing.

Neil Kokemuller
Thursday, February 21, 2008
6:50 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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