Fed Rate Cut - Too little too late?

The fed rate cut of one quarter of one percent this afternoon is the big news of the moment, but ¼ % hardly seems worth the effort. The Federal Reserve Board lowered the cost of borrowing Wednesday with a quarter-point drop in rates in hopes of energizing an economy troubled by a sagging housing market and soaring oil prices.

This is the second reduction this year in the federal funds rate — charged on overnight loans between banks — and was widely expected, if not this small a cut.

In September, the Fed slashed the federal funds rate by a half-percentage point to 4.75 percent in hopes of boosting the ailing housing market and buoying the overall economy. The move comes as oil prices near $100 a barrel. With oil at a record high, consumers will have to shell out more for gasoline, home-heating fuels and other products.

Federal Chairman Ben Bernanke and his colleagues on the board made the decision to cut the rate after a two-day meeting and in spite of a report Wednesday indicating that the overall economy has some resilience. The gross domestic product rose 3.9 percent during the July-September quarter.

“The economy is weakening and financial markets remain unsettled,” said Mark Zandi, chief economist at Moody’s Economy.com.

The continuing property construction slump was also dealt a further blow today as Taylor Wimpey, the BritIsh house builder warned it would set aside further provisions to cover losses at its US division as the country’s worst housing downturn for 16 years continued to bite. Prices in the US are still tumbling as are cancellation levels, which rose to 30 per cent in the third quarter for Taylor Wimpey, which said the US would only contribute modestly to second-half profits.

We recently covered news from another British company, British mortgages Abroad who announced a decision recently to withdraw completely from the Florida mortgage market.

The Fed suggested that it is done lowering rates for the time being. A brief statement explaining its action said the Fed now — after this second rate cut — judges that “the upside risks to inflation roughly balance the downside risks to growth.” The economy’s problems are mounting regardless of a waste of time cut such as this.

Its troubles include the worst housing slump in more than a dozen years as well as credit crises that have rattled financial markets here and abroad, causing some financial institutions to close, dramatically cut staff and oust top managers. Mounting losses from defaults on subprime mortgages took a toll on consumers and businesses alike. On Tuesday, Merrill Lynch, one of the nation’s largest financial brokerage firms, ousted its CEO Stan O’Neal after the firm had to write off $8 billion related to investments in subprime debt.

Now, with lenders tightening mortgage standards, it’s harder for prospective buyers to qualify for loans.

Meanwhile, the slump deepens: Sales of existing homes tumbled a record 8 percent in September, marking the largest decline since 1999, according to the National Association of Realtors. The newest worry is the latest surge in oil prices as crude oil touched a record $94 per barrel.

The worry is that the combination of the deep slump in housing, a lingering credit crunch and rising oil prices will severely dampen consumer spending, the economy’s main growth engine. “The economy is facing a perfect storm right now of a crisis-related tightening of credit, higher oil prices and lower house prices,” said David Jones, chief economist at DMJ Advisors, a Denver forecasting firm. “We are going to see a significant slowing in growth.”

We still fail to see the significance of a quarter percent Fed rate cut. In real terms, this will have such an insignificant effect on the typical home buyer’s mortgage as to be hardly worth the trouble. We do wonder what the Federal reserve is thinking here and it seems too little too late in our opinion.