Fed Slashes Interest Rates

Here's the latest on today's rate cut which is sure to have big ramifications in the real estate market:

U.S. Treasury Secretary said this morning that an economic stimulus package is necessary and “as soon as possible”, as the global sell-off in stocks raises recessionary concerns here and abroad. Minutes before, Bank of America announced that its fourth quarter losses associated with sub-prime and CDO losses came in worse than expected at $5.28 billion, and commented firmly that credit risks remain highly elevated.

Separately, the Federal Reserve’s Open Market Committee this morning called for an emergency, inter-meeting rate cut of 75 basis points, reducing the rate from 4.25% to 3.50%, the largest cut by the FOMC since October of 1984, and the first inter-meeting rate cut since the Fed cut rates at the post-09/11 market re-open on September 17, 2001.

The Fed has now lowered rates by 1.75 points since September 18th of last year. The cut was not a complete surprise to the markets, and came just twelve days after U.S. Fed Chairman Ben Bernanke had stated that the Fed would remain “exceptionally alert and flexible.”

Banks have or will reduce the prime interest rate to 6.5% on this news, which will have a benefit impact to many credit facilities, including variable-rate home equity loans.

The Fed will meet as scheduled a week from today for a two-day meeting, and the market is still looking for additional easing by another 25 basis points, or more, as a downside risks to the economy and a recession are clearly an overarching concern.

A month ago, the market expected the Fed funds to reach 3.25 by year-end, and two weeks ago the market moved that year-end number even lower to 2.75%. Today, the futures market is looking for the Fed’s benchmark rate to be just above 2.0% by September.

The Dow at the open gapped down over 400 points, as expected, and has improved to minus 350 points just now. The ten year treasury stands at 3.54%, up 24/32s in price, and mortgage prices are up 11/32s in early trade. Obviously, mortgage rates will improve by 0.125% or more in a couple of hours when rates are updated.

Today’s rates may equal the lows set in June of 2003.