The Fed Cut Rates & My Intuition Tells Me It Won’t Work Out As Planned

September 19th, 2007

As everyone knows, the Fed cut rates by 0.50% to help put a stop to some of the negative effects on the US economy like the falling home prices. This rate cut goes against everything I believe. I think the US housing market NEEDS to cool a bit and prices NEED to come back down to a reasonable level. It’s healthy for a RED HOT market (like it has been for so long in some parts of the country) to have some setbacks. Things don’t just go straight up forever. We are also entering a period when the Baby Boomer’s children want to purchase homes and are forced to spend over $500k to get an average fixer upper… this is ridiculous. At the same time many baby boomers want to cash in on the real estate gains… but at higher prices than many of their children’s generation can afford.

The main reason I don’t like the rate decrease is because the US can’t keep loaning its way out of recession. Loans must eventually get paid and a lot of people are now mortgaged to the max. Perhaps the worst part of this is that if this rate decrease doesn’t work out as planned (which I have some doubts that it will) it will show even more weakness… I think the rate decrease will do ALMOST nothing and therefore it will make people see more weakness in the market than if the Fed had done nothing… I mean its bad when the markets are going down a little, but when the interest rates cuts don’t work… that is worse.

Perhaps the interest rates aren’t the main reason housing is faltering… perhaps the reason is that everyone has bought a house in the last several years due to low interst rates. That is the equivalent of a whole lot of people spending a lifetime of earnings all at once… that is going to cause an economy to do well. Now that so many people have spent a lifetime of earnings, they are committed to paying for it and must now live more frugally… they aren’t going to rush out and buy ANOTHER home on top of the one they already have, so the market is going to cool down using that logic. Combine this with some of the job losses and it’s a bit of a mess. Of course when everyone lists their homes for sale they want top dollar but at the same time no one wants to pay top dollar now that they know the housing market is cooling down.

If interest rates aren’t the main reason, then lowering the interest rates might not have the desired effect. It might give US home owners some extra breathing room if they re-mortgage at a lower rate, but they are still financially stretched with all other costs going up. Not only has the dollar lost a lot of value in the last year, but this rate decrease will make that worse! Everything that is imported now costs more money! I don’t think it will work… call it my suspicion, hunch or intuition… but the Fed should have left it alone and weathered the storm a bit more…

On another note, Peter Grandich also believes the US stock market is headed lower and has shorted it through two exchange traded funds… SDS (which is at $50.43) which is a bet that the S&P 500 will go lower on 2:1 leverage and QID (which is at $40.84) which is a bet that the NASDAQ 100 will go lower on 2:1 leverage.

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