Interest Rates Will Continue to Drop

(February 05, 2008) Since August 2007 the Fed cut rates by no less than 225 basis points. This is the most aggressive easing since the early 1980s when the Fed was targeting money supply growth and not inflation. But the market is expecting more. Note that the bond market is already pricing in a recession. And in every recession the inflation-adjusted fed funds rate was negative.

Today at 3%, the fed funds rate is about one percentage point above inflation. So it’s hardly a surprise that the market is now pricing in another 100 basis points rate cut by the Fed. At the minimum, the market will get 50 basis points. And if we are indeed in a recession, the Fed will cut by additional 50 basis points.

Libor Rate Down

The good news is that the Libor rate (inter-bank loan rate) is starting to react to the Fed’s moves and it is down by 175 basis points over the past few months. But the market is still nervous—and the reason is the fate of the monoline insurers—which is probably the most critical issue facing the market at this point. What happens when a monoline is downgraded is simply that the underlying value of its written protection declines. If a monoline goes under, the underlying protection would effectively be worthless.

Read the complete article at North American & International Economic Highlights

Source: CIBC World Markets (Benjamin Tal, Senior Economist)

Jim Sparrow sells Calgary Real Estate with Keller Williams Platinum Realty & specializes in South Calgary estate and luxury homes. Visit our website at Calgary Luxury Real Estate or contact me directly at 403.703.2404

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