Wednesday, December 12, 2007

Fed's Battle Plans For Today's Credit Crisis

The Federal Reserve lowered interest rates for the Fed Funds rate and Discount rate by 1/4% each yesterday. The market was not happy with that, looking for deeper cuts, and the DOW fell by nearly 300 points. Today the Federal Reserve expanded more on their plan to combat issues in our market. Mainly they are offering liquidity by making funds available for banks to borrow.
This is why so many mortgage companies failed earlier this year. Their source of funds dried up and they were forced to shut their doors overnight. The Federal Reserve along with other central banks, European Central Bank, the central banks of England, Canada and Switzerland, to confront what it called elevated pressures in the credit markets. The Fed will create a temporary auction facility to make funds available for the financial markets during this credit crisis. The market was very pleased with this plan and the DOW rallied.
It makes a lot of sense that lower rates are part of what caused this problem and won't necessarily fix the problem. This plan of making funds available to the credit markets is good. Lenders closed their doors earlier this year due to their source of funds being turned off. Now they will have a place to turn for temporary relief and not be in a do or die situation from their source investors. Only time will tell and I hope they are right.

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