Thursday, February 21, 2008

Rate Cuts Aren't the Answer

I've strenuously argued against cutting interest rates for awhile now. There are several reasons for this.

1.) Even before the Fed started lowering interest rates, overall interest rates were not that high.

2.) Inflation is a bigger problem than the Fed thinks.

3.) Lower rates won't do squat about financial firms wrecked balance sheets.

Now we're learning that lower rates don't mean, well, lower rates..

Mortgage applications fell 22.6% in the week ended Feb. 15, the Mortgage Bankers Association said. That's the lowest since the week ended Jan. 4.

The 30-year fixed mortgage rate soared 37 basis points to 6.09%, the highest since late December. It's continued to surge this week.

Longer-term mortgage rates are closely tied to the 10-year Treasury yield, which has roared back in part due to inflation concerns. The benchmark yield was unchanged at 3.90% on Wednesday.

Refinancing activity, which skyrocketed as Treasury yields and mortgage rates dived in January, is coming back to earth.

Applications for buying a home fell to their lowest level in nearly five years.


The article goes on to state:

Economists expect that slowing growth will naturally cool inflation. GDP advanced at just a 0.6% annual pace in the fourth quarter. Some analysts are predicting a mild recession in the first half of this year as job growth and consumer spending slow.


I don't see that until we see major economic cooling from China and India.