They have a lot of work to do…

Today the Federal Open Market Committee adjourned their meeting without a change in interest rates.  The primary focus of Chairman Ben Bernanke was on the need to resuscitate our private credit markets.  The Feds announced that they are prepared to buy long term treasuries if the credit trend continues to be tight in the market.

With so much attention to mortgage rates with recent refinance inquiries and now with increasing purchase activity, banks are exercising the law of supply and demand.  Currently the Fannie Mae 30 year fixed coupon rate is trading in such a fashion that mortgage rates should be near 4.5%.  However, due to the slow banking inquiries over the past 24 months many banks and lenders have downsized their operations to stay afloat.  With a surge in new applications the pipelines are full and the banks are holding rates slightly higher so they can manage the current loans in process.  The capacity of the lenders should be eased in the coming week or weeks as these loans begin to clear the temporary warehouse lines.

Stay tuned and be prepared if you have not already began the refinance process.  It is best to know you current situation and get your loan application started so when the desired rate is available you can grab it before it’s gone!

Call me at 503.798.9183 or email me by clicking on my name –> Conrad Venti.

The Federal Reserve released the statement regarding the Citigroup intervention.  Notice the guidelines by which the Fed states they will preserve the strength of our banking system and promote recovery.  Joint Statement by Treasury, Federal Reserve, and the FIDC on Citigroup.

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

• We will work to support a healthy resumption of credit flows to households and businesses.
• We will exercise prudent stewardship of taxpayer resources.
• We will carefully circumscribe the involvement of government in the financial sector.
• We will bolster the efforts of financial institutions to attract private capital.

Click here to view the Term Sheet

Today the Federal Open Market Committee unanimously voted to reduce the benchmark rate to 1%.  The prime interest rate (rate consumers borrower at) will likely follow.  The .5% dropped brings the fed funds rate to a half a century low.

The Feds have made the move to correspond with recent actions to help our hurting economy.  The committee stated, “there are still downside risks to growth”, knowing that we are still going to experience a slowing period.

It is important to remember that the prime interest rate is reflected in consumer debt and some installment loans.  The benchmark rate is the rate at which the banks borrower funds from the fed overnight.  Mortgage rates have seen a slight increase since the announcement today and may settle in the coming days.

Last week one of my readers asked a few questions regarding my thoughts on the stimulus package and the economy in its state following my post “Possibilities Of Another Stimulus Package”.  I enjoy the interaction and questions and thought it to be prudent to post the reply:

Reader:

Do you really think that another stimulus package would boost our economy? Did the first one have that much of an impact? Would measures to improve access to credit boost the economy, but leave us right back how we got here, giving loans and money to people who couldn’t sustain payments? Just questions, I guess, no solutions, but I’m curious about your thoughts.

Today Federal Reserve Chairman Ben Bernanke share with Congress his concerns for the economy that continues to see a slow down.  Despite the recent movements by the Bush Administration and the global efforts of the world’s central banks, the US Economy is still continuing retract.   The financial and credit markets continue to show daily uncertainty.

The Federal Reserve has left the door open for another rate cut during its meeting on October 28-29.  Bernanke believes stimulus provided by monetary policy along with stabilization of the housing and credit markets will help the economy set a strong foundation.

Bernanke proposed an additional stimulus package that could total anywhere from $150-300 Billion.

“If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers,” Bernanke said. “Such actions might be particularly effective at promoting economic growth and job creation,” he added.

Passage of an additional sitmulus package prior to election seems unlikely, however, the direction of the economy will deterimine how Congress will act.

Today the Federal Reserve, the European Central Bank, the Bank of England, and the Swiss national bank announced they will lend an unlimited amount of funds to commercial banks in an effort to revive the financial markets worldwide.  The Feds lead the way in the unprecedented event that backs the governments recent intervention.

In response to the central banking announcement the Dow rebounded with an advance of 936 points, the largest gain in 70 years.  The gain marked a sign of confidence in our financial system.  A single positive day does not prove a total revival coming in our market by any means, but investors have some hope in sight after an advance of this margin.

The week ahead will prove to make history yet again.

Today the Federal Open Market Committee unexpectedly lowered the federal funds rate by 50 basis points (.5%) to 1.5%.  Several central banks from around the globe also reduced funds rates by 50 basis points in an effort to restore some confidence in the markets.  The prime interest rate will be reduced to 4.5%.

The FOMC acted fiercely with this cut due to evidence pointing to weakening economic activity and a reduction in inflationary pressures.  The financial turmoil and perceived unavailability of credit has caused spending to decrease significantly.  The FOMC hopes the reduction will encourage spending and expects the decline in energy and other commodity costs will reduce the upside risks to inflation.

Tuesday the Federal Reserve Board met and left the federal funds rate unchanged despite the news of Lehman Brothers’ bankruptcy and the buy-out of Merrill Lynch.  The federal funds rate, which banks charge each other for over-night deposits, will remain at 2%.  The prime interest rate will follow suit, remaining at 5%.  Consumers are more familiar with the prime interest rate because the rates for home equity loans/lines of credit and credit cards are tied to the prime rate.

Although there has been several significant downturns with Wall Street and banks in our country this week the Federal Reserve felt that inflation is high and lowering the rate could cause an increase in inflation.  The Feds expect inflation to moderate through the next quarter.  Tuesday’s meeting laid the groundwork for a rate reduction before the end of the year.

As always, if you have questions about how this affects you, please don’t hesitate to ask.