Tuesday, January 15, 2008

Dont't Hold Your Breathe

If you are waiting for the Fed to save us, you might want to look elsewhere for your ray of sunshine. In his latest Financial Market Strategies report, Wells Fargo senior economist Eugenio J. Aleman indicates that people banking on a Fed rate cut to spur home sales are looking in the wrong place for help.

In fact, he thinks that even if the Fed slashes rates it would do little to help the market. Here’s his reasoning:

“Let’s say that the Federal Reserve lowers the Federal Funds rate to 2%, does this mean that we are going to start buying homes and U.S. automobiles again? The reason why nobody is willing to buy a home today is not that interest rates are too high; the reason is that home prices are too high. Nobody will want to buy a home today when they know that if they wait they could get the home for a large discount.

“This means that it does not matter what the interest rate is on mortgages; nobody is buying. And thus, it does not matter what the Federal Reserve does with the Federal Funds rate. And I actually believe the Federal Reserve knows this. They are well aware of the ineffectiveness of the Federal Funds rate to help bring back the U.S. housing market and/or the U.S. auto sector. Thus, I still believe that many of the Federal Reserve Governors are going to be reluctant to lower the Federal Funds rate even if they ultimately go ahead with a decrease in the rate on January 30th.”

Aleman argues that the bigger concern for the Fed right now is inflation.

CLICK HERE for full report.

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