The Fed Steps Into The Commercial Paper Market

The Fed announced this morning, October 7, 2008, that they will enter the commercial paper market:

"... Fed will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers"

The Fed hopes this latest round of measures will help to liquidate the frozen business credit markets as many small businesses are increasingly feeling the pain of not being able to obtain business credit.


The short-term effects of the myriad of measures taken by the Fed over the past six months will undoubtedly begin to filter into the market over the next year. What will the long-term effects of pumping this unbelievable amounts of liquidity into the market?

The Bailout, Real Estate ... An Uncertain Future?

Today the House agreed to the new bailout bill, 263 Democrats to 171 Republicans. The government tells us that the intent for this bill is to help liquidate a frozen credit market.

The current credit markets are so tight that some business owners are now struggling to obtain financing for simply keeping their businesses afloat let alone business expansion.

Ben Bernanke said "the legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."

The said result, foreclosures should begin to subside since we should be able to obtain loans again as banks begin lending with new confidence as the government soaks up their bad debt. As loans become more available, it is believed that there is a pent-up demand for housing and Americans will begin to purchase residential real estate again at their current bargain basement prices in many housing markets. As we begin to purchase more homes, the inventory will subside and prices should begin to stabilize before the demand and shrinking inventories ultimately begin to put upward pressure on housing prices.

Time will only tell if these favored results will actually begin to positively affect our housing market. Unfortunately, this bill is laden with nearly $150 Billion in "pork" legislation and does not address many of the issues that ultimately lead us to this point.

We must demand more of our government but can begin by demanding more from ourselves ... if there ever was a time to pay attention!

Fed Holds Steady With Short Term Rates - 2%

As expected, the Fed held steady keeping the central bank's short term interest rates at 2%.

The Fed warned that the inflation outlook remains "highly uncertain" but also indicated that problems in the credit and housing markets, as well as high energy prices, are likely to hurt economic growth over the new few quarters.

The Fed also dropped language that it used in its last statement about downside risks to the economy. In June, the Fed said those risks "appear to have diminished somewhat."

Some economists saw the absence of that phrase in Tuesday's statement as a sign that the central bank is growing more concerned about a deeper-than-expected recession.

-Money.cnn.com

With the housing market turmoil, high oil prices (even though there has been significant downward pressure on pricing per barrel over the past week), and inflation worries, I believe the Fed will not take any drastic measures for the foreseeable future.

The Fed’s Dilema

I believe the Fed will indeed hold tight, neither raising nor lowing rates, since they are caught between inflation and further economic pressures to control a steadily weakening US economy.

Update August 24, 2008: It now looks like real estate is going to remain challenging in many markets through the remainder of 2008 and through at least the beginning of 2009. Fannie and Freddie are at all time lows in regards to their price per share. With the current economic challenges and an election year upon us, I still believe the Fed will not adjust the Fed Fund's Rate leaving it at 2.00%.

Fed Funds Rate - Where Are The Rates Headed?

Update August 24, 2008: The fed remains between the proverbial "rock and a hard place" in regards to the rates as there continues to be downward pressure on real estate, further deterioration of the overall US economy, and inflation is beginning to rear its head!

Update September 9, 2008: Jobless claims continue to rise. The unemployment rate rises to 6.1%.