Monday, August 20, 2007

Fed shows concern over housing

Apparently, inflation is no longer the Fed’s primary concern. On Friday, the Federal Reserve cut its discount rate by half a point. This is not a Fed Fund rate cut as yet, but still some easing of the Fed’s policy. The discount rate is charged for temporary loans to banks, so lowering the rates means more money for mortgage issuers.

Analysts believe that this move will be met with little enthusiasm, and even if it helps improve the sector somewhat, it will not be effective in the long term, but will rather postpone bigger problems in the industry. According to some, this move is designed to bail out troubled mortgage lender Countrywide, as rumors of a possible bankruptcy filing started spreading last week. Right now, it is widely believed that the Fed’s next meeting in September will bring a rate cut, despite the central bank’s reluctance to put the economy at risk of higher inflation due to cheaper credit.

Friday’s move shows that the Fed is taking seriously the turmoil in financial markets, a problem that received little comment until recently. Any actions in between meetings are very uncommon for the Fed, but policy makers must have changed their minds quickly after they took their decision to hold rates steady the last time they met.

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