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[Fed Smart] Liquidity Does Not Equal Lowering Interest Rates

A trifecta: all three recent governors in tri-state area (New Jersey [1], Connecticut [2] and New York [3]) resign in disgrace = reason why the New York regional real estate is faring better than the remainder of the country?

The Federal Reserve is finally getting kudos from economists for an intelligent attempt to solve the credit liquidity crisis [4] by floating $200B into the markets, allowing banks to borrow at very low rates and use (gasp) their mortgage backed securities (that are very difficult to sell) as collateral.

The futures markets, which were leaning towards a 75 basis point rate drop [5] at the March 18th FOMC meeting quickly pulled back to a 50 basis point drop as a result.

The offer amounts to a surgical strike at one of the most worrisome new developments in the global credit crunch: A wave of investor selling of mortgage-linked securities. The heavy selling is driving up mortgage interest rates, dealing a fresh blow to the flagging housing market, and threatening the nation’s economy by making credit harder to come by.

I wonder if the Fed is accepting the face value of these securities? After all, there is a limited market for them.

There is a disconnect between the Fed lowering rates and investors wanting to unload the junk they thought was higher rated paper. Simply lowering interest rates is not the only course of action [6] to take by the Fed. It is apparent the Fed has other tools in their shed [7].

Deal with credit liquidity first and the rest will follow.

I remember stagflation of the 1970s and we definitely don’t want rising inflation with lower economic growth or recession.