The Fed and the Economy
Aug 11, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Yesterday, the Fed issued their latest view of the economy. As expected, their outlook was not encouraging. Among other points, the Fed announced that they would reinvest principal payments from the mortgages they hold on their book into long term treasuries. Although, the Fed really only has the ability to manipulate short term rates via Fed Funds, these anticipated purchases are an attempt to adjust long term rates downward as well. According to a statement from the FOMC (Fed Open Market Committee), “The pace of economic recovery is likely to be more modest in the near term than had been anticipated”. As such, it is unlikely that short term rates will increase any time soon.
This, obviously, is not good news. The DJIA, which had been down almost 150 points prior to the announcement, actually rallied to almost even before closing down 54 points. However, the futures this morning are down dramatically. European markets are down about 1.5-2%, which is the equivalent of roughly 200 Dow points.
Critics of the current administration (who seem to be growing in number every day) site the fact although the government has spent incredible sums in stimulus and bail outs, it has not had a major effect on Main Street America. Many industries are in deep trouble. The housing market continues to struggle under a combination of oversupply and a huge inventory of homes in foreclosure. According to Zillow.com, about 22% of all homeowners are under water, meaning that their homes are worth less than their mortgage. To add fuel to this fire, a Deutsche Bank report last week, this number could hit an incredible 48% before this recession ends. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adBYDzUMt68k
I wouldn’t even hazard a guess as to what mass defaults would do to the housing and financial markets. Stay tuned.
