The Economic Week In Review…..

8. December 2007 by Burbank Real Estate.

After quiet days on Monday and Tuesday, the Dow soared ahead on Wednesday and Thursday, stalled on Friday. The overall weak trend in the data reported works in favor of a rate cut next week. It should be noted however that the stronger numbers in the payroll report could prove troublesome in the Fed’s decision making process.

Items of note:

• President Bush and Treasury Secretary Paulson unveiled details of the “Hope Now” plan to “rescue” ARM borrowers……essentially it targets roughly 1.2 million borrowers and has been labeled as too little too late. For more details, here are some good articles…Bloomberg, LA Times, New York Times.
• Under the heading of “Are you kidding me?” State of Florida short term fund for cities and counties has suffered huge losses due to investments in SIV’s(structured investment vehicles) and had to be closed due to the amount of withdrawals. Additionally about $1 billion dollars of their retirement fund was invested in these vehicles.
• Under the heading of “Are you kidding me?, part 2″Orange County California announced that they had $460 million dollars of SIV investments currently on the downgrade list.
• Bonds-The 2 year closed at 3.10%, 5 year at 3.5% and the 10 year at 4.1%. These yields are all roughly 30 basis points higher than the lows recorded earlier in the week.

All eyes are on the Fed next week with an anticipated 25 basis point cut to the fed funds rate. There have been rumors of a 50 basis point cut but I’m not sure the data this week will fully support a move of that size. One argument for it is to cut deep and quick in order to help out the banks and lenders with the mortgage mess. Another scenario that may play out is that the Fed lowers the fed funds rate by 25 basis points and the discount rate by 50 basis points.

The reason for a split decision is simple….a lower fed funds rate would aid the consumer directly in that it would affect the interest paid on credit cards but it could entice the consumer to apply for more credit. Lowering the discount rate helps banks as this is the rate they pay to borrow funds. Whether that saving will be passed on to the consumer is another matter. A more likely scenario is that it will go towards the bank’s bottom line.

Have a great weekend!

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