Few Expect Fed Rate Cut to Soothe Markets
Would access to cheaper money really relieve the growing anxiety among U.S. financial markets about shoddy mortgages and declining home prices?
Even as the chairman of the Federal Reserve vowed Friday to act “as needed” to keep the economy from sliding into recession, some analysts and even some policy makers caution that the central bank’s main tool may be ill-suited to the problem it faces.
Investors who financed major commercial lending have become spooked as the housing bubble turned to a bust and foreclosure rates on subprime, or bad credit mortgages, began to skyrocket.
Money for subprime loans, for borrowers with weak credit, has already evaporated. And the paralysis has spread to more traditional home loans, business loans and corporate borrowing for leveraged buyouts.
But the Fed’s main weapon for restoring confidence — reducing its benchmark rate on overnight loans between banks to 5 percent or less, from 5.25 percent now — would have little effect on fears about credit quality.
“The reason there isn’t a market for these credits is that people don’t know what price they should be trading at,” Edward E. Leamer, professor of management at UCLA, said. “That’s not going to be affected by a small change in the federal funds rate.”
Over the next six weeks, more than $1 trillion worth of commercial debt is set to come due and will need to undergo refinancing, more than five times as much as came due since the disruption began one month ago.
Fed officials say most of that $1 trillion in maturing debt has nothing to do with bad credit home loans and any other kind of mortgages. It includes credit card debt, car loans and business loans.
One official compared the load of this maturing debt to a pig in a python: a bulge that would be take time to digest, but could eventually be absorbed without huge problems.
Much of the digesting, in a manner of speaking will be by big banks, which provided backup credit lines for home mortgage lenders.
Continue reading this New York Times article on the possibility - and the possible impact - of a reduction in mortgage interest rates …