The Wall Street Journal posted this interesting “Parsing of the Fed” yesterday…
If you were watching the markets yesterday, it was unusual in that both stocks and bonds rallied after a surprising move by the Feds to cut the rate by 50 basis points (.50%). As mentioned yesterday before the release, investors were expected to scramble as they changed positions and they did.
So, since the Policy Statement is what likely kept bonds moving higher, let’s dissect it as the WSJ already has…
Overall, Feds are fearful of both inflation and a recession. Say what? Their view on growth hasn’t changed since early August, but the move was “to help forestall some of the adverse effects on the broader economy”(recession concerns)> At the same time, they mention that inflationary pressures remain and will be watched.
So who are the winners after this change?
- Adjustable Rate Mortgage (ARM) Holders – Likely to see drop in rate if adjusting (see yesterday’s post…Don’t FIX It if Your ARM is Not Broken)
- Fixed Rate Mortgage Seekers – Mortgage Bonds also rallied yesterday and with a bullish crossover of the 25-day Moving Average and the 200-day Moving Average, the trend will likely be lower. Mortgage Backed Securities are not directly impacted by what the Fed does with the rate, but their Policy Statement and concerns about inflation are what drove the bond market.
- Home Equity Lines of Credit (HELOC) Holders – Rates tied to Prime will fall.
- Credit Card Holders – Most rates are tied to Prime and will likely fall eventually.
- Auto Loan Seekers – Most loans are indirectly tied to Prime and will likely fall as well.
- Others with loans tied directly or indirectly with the Prime Rate will benefit as well.
If there are so many winners, who loses?
Anyone seeking Certificates of Deposits (CDs), and many Money Market Accounts, among others. While their rates are not directly tied to the Fed’s move, as bank’s obtain cheaper money, they will likely start offering lower rates on CDs since they do not need that source of funds as much. Since Money Market Accounts use CDs as part of their investing structure, the reduced rates will carry over eventually. Other “secure” investments may see returns dwindle as well.
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