The big news this morning is that Fed chair Ben Bernanke is prepared to introduce a rate cut if it appears that one is necessary to keep the economy, especially in terms of the credit market, going. Inman reports on the willingness of the Federal Reserve to cut interest rates:
Expectations that the Federal Reserve will
cut the federal funds rate this year rose Tuesday after Sen. Chris Dodd
said Fed Chairman Ben Bernanke is “prepared to use all the available
tools at his disposal” to keep money flowing to mortgage lenders.
This stance is providing a great deal of excitement on a variety of fronts today. The stock market is improving on the news, as borrowing costs for companies will be lower. Other markets are also affected by the possibility of a Federal Reserve willing to cut interest rates. Some measure of risk appetite is returning, and investors are considering moving back into riskier stocks (this means that bond yields are likely to decline, though). And, while a Fed rate cut could mean that cash investments won’t yield as much, there are benefits to the ailing credit market (which is, I suppose, the point).
One of the biggest beneficiaries of a Fed rate cut will be, as one might guess, the mortgage market. While it is somewhat difficult to get a home loan now, it could be easier in a couple of months if the Federal Reserve does cut interest rates. The added liquidity would mean that lenders would be less risk averse themselves, and it would provide better rates for homeowners to move out of their ARMs and into fixed-rate mortgages. And it could get the subprime market going again. Although one would hope that the subprime market would be more cautious this time around.