The DOW is up again today, which just makes me wonder how long this feel good rally will last until the reality sets in the people are still up to their ears in debt, still can’t pay off their mortgages, and still don’t have incomes keeping up with even core inflation, much less food and energy costs. Anything over 1% in one day to me is a sign of irrationality, regardless of the news. Our economy is simply not growing at that rate.
As far as the rate cut, the LA times had mixed articles. I pasted them because after today they will require a subscription, so I apologize for the length:
“THE ECONOMY
Cut will aid homeowners
The Fed’s action will result in lower rates on certain loans. Savers, however, will see a drop in their earnings.
By Tom Petruno, Los Angeles Times Staff Writer
September 19, 2007
The Federal Reserve’s interest-rate cut will help many people save money on home-equity credit lines and adjustable-rate mortgages — but whether it will revive the troubled housing market is far from clear.
One risk is that the Fed’s move Tuesday could ignite inflation fears, which could drive up conventional mortgage rates and make matters worse for housing.
“If the Fed does revive inflation it’s going to put a damper on housing and other activity in the economy” by pushing up long-term rates, said Gregory Hess, professor of economics at Claremont McKenna College in Claremont.
In the short term, there will be some definite winners — and losers — as a result of the central bank’s half-point cut in its key short-term rate, to 4.75%.
Savers will lose as their interest earnings decline. But homeowners who have home-equity credit lines will see their interest costs reduced almost immediately, said Greg McBride, senior analyst at BankRate Inc. in New York. That’s because the majority of those credit lines are tied to banks’ prime lending rate, he said.
Major banks including Bank of America, Wells Fargo, Citibank and others quickly reduced the prime Tuesday to 7.75% from 8.25%. They typically keep it three percentage points above the Fed’s rate.
Many banks also link credit card rates to the prime, but card rates tend to be adjusted more slowly than home-equity loan rates, McBride said.
Some homeowners with adjustable-rate mortgages that will reset soon already were expecting a bit of relief, and the Fed’s cut may ensure that they get it.
Many ARM loans are tied to an index of one-year Treasury bill rates. That index has fallen since midyear; it was 4.15% on Monday, down from 4.99% on July 23, according to the Fed.
Rates on Treasury securities have slumped because some investors have rushed into those issues as a haven amid global financial market turmoil, and because others bought Treasuries betting that the Fed would be forced to ease credit.
“The bond market was far ahead of the Fed,” said Rick Keller, head of Keller Group Investment Management Inc. in Irvine.
Now, if the market anticipates more Fed rate cuts, it’s possible the one-year Treasury index will fall further, experts say.
Paul McCulley, a bond fund manager at Pacific Investment Management in Newport Beach, said his firm expected the Fed to continue paring its rate to at least 3.75% in 2008 because of the threat the sinking housing market poses to the economy.
“This is not a one-and-done type of world,” McCulley said of the rate-cut outlook.
But homeowners who have sub-prime ARMs with very low teaser rates, and who are facing a rate reset soon, may still be facing a new rate that’s far more than they can afford — 8%, say, instead of 8.5%, depending on how the loan is structured.
New home buyers and homeowners who want to refinance into a 30-year loan face the biggest question mark, because it isn’t certain that the Fed’s reduction in its short-term rate will translate into lower long-term mortgage rates.
That’s because long-term interest rates are set by the marketplace, not by the Fed. And one key consideration of investors in determining long-term rates is what inflation rate they expect, because inflation eats away at bonds’ fixed returns.
If investors think the Fed’s credit-easing move could stoke the economy and boost inflation pressures in 2008, that could result in long-term rates rising, analysts warn.
For the beleaguered housing market, that would mean “putting it in a worse bind” than it already faces, said George Goncalves, Treasury-market strategist at brokerage Morgan Stanley in New York.
On Tuesday, the 10-year Treasury note yield inched up to 4.47% from 4.46% on Monday, even as short-term rates fell. Thirty-year mortgage rates tend to track the 10-year T-note.
Still, because the 10-year T-note yield has tumbled from 5.05% in mid-July, 30-year home loan rates also have fallen. They averaged 6.31% nationwide last week, down from 6.73% in mid-July, according to mortgage finance giant Freddie Mac.
Keith Gumbinger, vice president at loan tracker HSH Associates in Butler, N.J., said there may be another obstacle to lower mortgage rates: Some struggling lenders, he says, “won’t be in any great hurry to pass along their savings” from cheaper money because they’re trying to fix their own battered finances.
For savers, meanwhile, the Fed’s rate cut is almost certain to mean that banks will trim the yields they pay on savings certificates, experts say. So some savers may want to lock in yields on longer-term CDs, depending on their income needs.
Those yields already have been drifting lower since mid-August as rates on Treasury securities have come down, in part anticipating the Fed’s move.
The average annualized yield on a one-year, $25,000 bank CD nationwide now is 4.16%, according to rate tracker Informa Research Services.
The key is to shop around, BankRate’s McBride said. Banks set their CD rates based on their funding needs, he noted, which means some may trim their payouts much less than others.
By contrast, yields on money market mutual funds are expected to fall across the board, assuming the Fed’s move has the intended effect of lowering rates on the short-term corporate IOUs that many funds buy.
Money fund yields should decline by about half a point over the next eight weeks or so, said Deborah Cunningham, chief investment officer at Pittsburgh-based Federated Investors. The average seven-day annualized yield on money funds was 4.69% last week, according to IMoneyNet Inc.
“Fed’s rate cut may be bad news for some
7:13 PM PDT, September 18, 2007
If Tuesday’s larger-than-expected cut in interest rates makes it cheaper and easier for people to get loans, that could be bad news for Yusupha Touray.
By his estimate, Long Beach resident Touray, 27, owes about $93,000 in credit card, phone, utility and hospital bills. “When my bills come, I know I don’t have any money to pay them,” he said. “So I don’t bother anymore.”
Nevertheless, Touray said he gets pitches from credit card issuers in the mail almost every day. If those pitches become a smidge more attractive because of lower interest rates, he said he may just be tempted to go even deeper in the hole.
“It’s amazing,” Touray said. “You keep saying no, and they just keep making more offers.”
The Federal Reserve said its decision to cut short-term interest rates by half a percentage point was intended to ease the credit crunch in the housing market. That’s another way of saying the main beneficiaries are heavyweight financial institutions that got slammed by investments in sub-prime loans.
For consumers, the rate cut will mean lower mortgages for some, but also lower credit card rates and lower rates for auto loans. And for those who aren’t careful, it could result in even more debt for a country that’s already drowning in consumer debt.
“There’s definitely a danger that people will be tempted to take out too much credit,” said Linda Sherry, a spokeswoman for Consumer Action in Washington. “They’ll use it for things they want rather than things they need.”
Since consumer spending accounts for about two-thirds of the U.S. economy, that’s not necessarily a bad thing. But unless managed prudently, it can spell trouble for many households.
According to Fed statistics released last week, U.S. consumers are carrying a record $2.456 trillion in debt (not including mortgages).
The amount of revolving credit, such as credit cards, carried by consumers rose in July at an annual rate of 6.6%, or by $5 billion — the third straight month of significant gains. Revolving credit was up 6.4% in June and a whopping 10.9% in May, the Fed reported.
Nonrevolving credit, which includes auto loans, registered only a modest 1.9% gain in July. That compares with 5.6% in June and 5.5% in May.
With lower interest rates, it’s possible that revolving and nonrevolving credit will shoot higher. And with it, consumers’ debt load.
Sima Azim knows all about that. The windows and display cases of her downtown L.A. jewelry store drip with bling — gold chains, gold bracelets, gold watches.
Azim, 45, said that with the economy the way it is, she’s seeing more people using plastic instead of cash to buy baubles.
“People love the gold,” she said with a shrug. “So they use their credit.”
Prowling the downtown area, I had no trouble finding people with debt problems.
Frank Banueloz, 44, works as a legal analyst for the state Department of Justice. He said he tries to manage his finances wisely. Even so, he and his wife are carrying about $10,000 in credit card debt.
“I’m trying to use cash more instead of credit,” he said. “It’s hard to do.”
The flip side of consumers’ record high debt level is a pathetically meager personal savings rate. According to the Commerce Department, the nation’s savings rate for all of last year was minus 1%, the worst showing since the Great Depression.
That means people were spending every last penny they earned, and then were dipping into savings, stocks or other resources to spend just a little bit more. The savings rate crept up to 0.7% in July from 0.5% a month earlier.
load during the first three months of the year, according to the liberal-minded Center for American Progress. That’s up from 13% in the first quarter of 2001.
Toluca Lake resident Daryl Sanchez, 40, is typical of many middle-class Southern Californians. He’s well educated, works hard, yet still struggles to ease his debt burden. Yet with student loans, credit cards and other bills, Sanchez said he’s more than $50,000 in the hole.
“Everything’s so expensive,” he said. “Just the basics, like gas. It’s so easy to get into debt.”
Sanchez said he’s trying hard to reduce his debt. “It’s challenging,” he said. “There’s only a finite amount of income coming in.”
The experts advise consumers to limit themselves to only one or two credit cards, and to pay off the balance each month. Resist the temptation to make minimum payments, which can trap you in an endless cycle of debt.
And throw away all those solicitations from card issuers spilling into the mailbox, no matter how attractive the terms may appear, especially with lower interest rates.
John Barnes, 76, works as a construction inspector. On Tuesday, shortly after the Fed slashed rates, Barnes was watching as a power shovel dug a trench in a downtown street.
Credit card debt? Nah. He said he doesn’t even carry plastic.
“If I can’t pay for it, I don’t get it,” Barnes said.
Such simple advice. And it can make all the difference.
Consumer Confidential runs Wednesdays and Sundays, and frequently in between. Send your tips or feedback to david.lazarus@latimes.com.”