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FED LEAVES KEY RATE UNCHANGED - But What are they Really Saying?

FED FUNDS RATE REMAINS AT 2% IN UNIFIED VOTE, BUT FED LEAVES OPEN THE POSSIBILITY OF ACTION BETWEEN MEETINGS!

The bankruptcy of venerable Investment Bank Lehman Brothers over the weekend.  The sale of Merrill Lynch to Bank of America.  The crisis at American International Group - AIG - the world's largest insurer.  All had exposure to the tumbling of the mortgage market due to defaults and the spike in foreclosures since last year.

Combined with last weekend's federal takeover of major U.S. Loan Guarantors and Investors Fannie Mae and Freddie Mac, a ton of turmoil has been created in the financial market over the last ten days.

Yet, the key Fed Funds Benchmark was left unchanged by the Fed Board of Governors today, despite the prediction by many experts that the chance for a 1/4 point drop was likely, to calm jittery markets.

However, the Board of Governors reserved the right to re-visit the market situation and change their position if the climate surrounding the financial markets, and the U.S. Economy, changed in the near term.

In their official statement accompanying their action, the Fed expressed concern that the difficulty of obtaining credit, especially in the housing market, are likely to "weigh on economic growth over the next few quarters."    However, they are concerned that inflation could intensify, although they expect it moderate for the balance of 2008 and into 2009.

Before the Lehman Brothers and Merrill Lynch moves this past weekend, The Fed seemed inclined to keep rates unchanged during its meeting this week.  They see the recent expansion of the U.S. Economy - a 3.3% growth rate during the Second Quarter, 2008 - to slow sharply within the coming few months.  They feel inflation worries are receding amid substantial declines in the price of crude oil and other commodities in recent weeks.

Rates have been coming down quickly since last September as a reaction to the U.S. Housing Slump.  The benchmark Fed Funds Rate one year ago was 5.25%, compared to 2% today.  At this time,  Fed officials saw no benefit to reducing rates again, despite the recent action in the financial markets. 

Will the Fed stance have any impact on mortgage interest rates?   No, most likely, according to many experts, as other issues - tightened loan underwriting requirements, and the availability of mortgage funds - more directly impact mortgage rates. 

Last week, after the Fannie/Freddie takeover by the U.S. Treasury, 30-Year Fixed Interest Rates here in Chicago fell by nearly 0.4% almost immediately, as investor confidence in the stability of both organizations increased as the Fed took over.

Read coverage today in The Wall Street Journal, in an article by Sudeep Reddy and others, as well as in James P. Miller's story in The Chicago Tribune.

DEAN MOSS & DEAN'S TEAM CHICAGO

Posted: Tuesday, September 16, 2008 2:19 PM by Dean's Team

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