Wednesday's Fed Action: Perfect, Helpful to Housing

The Fed has taken the negative connotation from the discount window and turned it into an international currency based auction. Nice. Rather than just lowering and setting the rate, the Fed, in conjunction with Central Banks in Canada, the EU and Switzerland have set up an auction system for short term funds. Here is the Fed statement.

The key here is in the second to last paragraph in which they say "potential usefulness of augmenting the Federal Reserve’s current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit." Essentially the Fed would turn the rate into a more floating market based rate for institutions.

The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. When you consider the federal funds rate is expected to decline over at least the next two months, during which the loans will be outstanding, the interest rates should end up being below the current federal funds rate.

For housing, this news is also beneficial. Bernanke & Co. created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. The "swaps" will enable the European Central Bank and Swiss National Bank to make dollar loans to banks in their jurisdiction. The idea is that this will put downward pressure on interbank dollar rates, principally the London Interbank Offered Rate, or LIBOR.

Why does this matter for US housing? Most ARM's out there are indexed to the LIBOR rate and that has stayed uncomfortably high. This is causing these ARM's to reset at very high rates. By bringing LIBOR rates down, the ARM's then reset at lower rates. Lower ARM rates mean lower payments for homeowners.

Both the DIA and S&P rallied 1.5% on the news, wiping out almost all of Tuesday's losses.

Comments

[Rocktex]

On the surface, you sounds right.

However, I believe the main purpose of the 4 auctions target at inflation and eventually bring down (or more correctly "regulate") the international liquidity. In other words, it is to reduce availability of "private" money infusion from a "soevereign fund" or "Middle East investor" to those speculative fund managers collectively.
The result? To keep avoid possible recession and help all the sectors of Economics ,except housing. Let's housing dust settled by itself naturely.

[Rocktex]

Maybe you see a good point about Libor.

Then, there is more money supply, more liquidity. It shoud be interpreded as a good news, right?

But how come all the stock markets drop so far? Included are those future market.

Yes, I checked it last night. All of them went down from their openning, except London stock went up, then down.

We will see how is the reaction of today's NY stock market. One word "DOWN."

[your dad]

Todd, You are really lame.

[Rocktex]

Gee! Today's market: mixed, not down?
DJIA 13517.96 0.33%;
Nasdaq 2668.49 -0.10%
S&P 500 1488.41 0.12%
Russel 2000 769.46 -0.29%

Two GSE's stocks even up! So there is no way for me to say I was right at my previous saying: One word "DOWN", right?

Different indice has different sample. What is it here we are talking about? Non-GSE financing institutions and the housing sector!

What's right or wrong? Please figure it out by yourself.

[naples]

todd, you do have a brain now use it.

hint: you can always refinance (change the liability side of your balance sheet) but you cant change the purchase price.

last i saw, the gig is up! no one there think homes are appreciating and no stupid state fund buying SIV yields at 5.5% for junk assets. so no money going into RE.

hey but its nice to know millions will be working for the bank over the next twenty years. if they happen to get divorce, change jobs etc they can file BK later.