Points of Interest

The headline from CBS MarketWatch is that "Consumer Inflation moderates in February".  "Led by a quirky decline in energy costs" the CPI was held down by a drop in energy prices.

When we do the math and consider last months gasoline prices and today's, the report will not be the same for March.  Let's say gas prices were $3 last month and today they are easily over $3.25 per gallon.  By our calculations that's over an 8% increase (or tax).  We are not economists, but it would seem that some other energy component for the consumer would have to drop substantially for the CPI to remain flat next month.

Our dollar is dropping in value, a barrel of oil was over $111 yesterday and in either case they are both going the wrong way in our estimation.  We heard an energy trader make what seemed to be a reasonable suggestion yesterday.  The US Gov't should stop buying oil for the nation's reserve and competing with consumers for supply.  No need to withdraw any reserves, just stop buying more.  That alone could crack the upward spiral of speculative pricing.

We are living in interesting times.  Should the Fed have dropped the Fed Funds rate a full point yesterday it would have been the most since Paul Volcker slashed the rate 175 basis points in 1984.  Sounds like a lot.  And yet Volcker's move was only a 15% relative move.  A one point move yesterday would have been a 33% move or reduction.  As it was, the rate was reduced by 25%.

It's all relative.

The question that I hear being asked is when will this help mortgage interest rates.  Many are asking, "Isn't housing the problem?"  And although it's really a symptom of a bigger problem, it's where you and I feel the biggest disconnect.  For most of us in the US, our homes are our biggest asset (and liability).  We are most interested in mortgage rates and feel the interest rate cuts haven't made their way through to Main Street.

Fed Rate Cuts Do NOT Necessarily Translate Into Lower Mortgage Rates

Over the last week mortgage rates had been drifting lower and the 10 year bond had been approaching the low it reached on January 23.  Before the rate cut bonds reversed and within an hour after the cut we received the first of many price increases for mortgages.  One lender actually sent (4) four separate price increases.

Yesterday's rate cut will help those with home equity lines of credit (HELOC).  That could reduce a payment stress somewhat.  But for those who are facing an increasing ARM rate it may aggravate the situation.  Last month it was reported that Countrywide and USAA Federal Savings Bank were actually shutting down or limiting the use of existing HELOCs based on the reduced home values.  Imagine having a line of credit you were counting on for emergency purposes and then it's unilaterally closed by the lender.

Oh, the irony of it all...

And as pointed out by Kevin Depew over on Minyanville.com one more twist arrives with the IPO of Visa.  Here's the largest credit card network coming to public market the same day as the Fed is deliberating on the credit crisis with largest interest rate cut in the last 20 years.  Once again, truth becomes stranger than fiction.