Federal Reserve & Interest Rates

Consumer spending has declined significantly since the economy has been performing poorly. Disposable income is practically non-existent for many, particularly those who have had a difficult time keeping up with their mortgage payments. There are several little things that you can do in order to save some extra money to back up your income in case there are some expensive emergency situations.

Always, without fail, put a part of your paycheck into savings. You might put $100, $50, or $2, but the important thing is that you keep building your savings. Pay your savings account like a bill, and when things get a little tight, you will have some back up funds. Put the money into an investment or in an interest bearing savings account. Purpose not to touch the money unless you have a major emergency or will be late on an important bill. Make savings a priority.

Make sure that you are not paying for things that you are not using. Check your credit cards statements for subscription or membership fees. Are you using these services? If not, make sure that you get on the phone and cancel the repeating charge. Little fees add up. A small charge of $15 dollars a month adds up to $540 in just three years.

Cut back on impulse buys. You should shop on purpose, not by accident. Before you go out, survey what you think you might need or want and set a budget. Decide on a limit for how much you will spend on certain items, and make sure that you space out larger purchases so that you can pay one off before the next one is added on. Smaller purchases add up to, so make sure that you had the intention to purchase the item you are looking at in the store. If you didn’t plan for it, don’t pick it up. If you really need it or really want it, you will come back for it. You should also do your homework and check the internet for the best prices on the items you are looking to buy. Take advantage of sales as well.

Pay debts faster than you have to. Interest savings can truly add up as well, if you pay your debts ahead. Always pay more than the minimum on your credit cards, and if you have a mortgage, try to pay a little more towards the principle each month than required. Getting out of debt sooner is the best way to save money. Why pay extra so you can pay slowly if you don’t have to? If you have multiple loans and credit card bills, consolidate them into one payment. A single interest charge will cost you less than multiple interest charges in the long run.

The Bush Administration is instituting a new plan to help homeowners who are facing foreclosures. The new plan, called Project Life Line, will affect a great deal of borrowers that are in danger of losing their homes.

The plan specifically addresses every homeowner who has been delinquent 90 days or more. The Treasury Department, and the Department of Housing and Urban Development are announcing this morning. Serious delinquencies headed for foreclosure will be paused for 30 days so that borrowers can communicate with lenders to work out more affordable payment terms. All foreclosure activity for these homeowners will be suspended for a month, including all stages of foreclosure.

Mortgages held by six major chain banks are already a part of Project Life Line. These are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc. and Wells Fargo & Co. Other lenders will hopefully become involved in the plan as well.

This plan will affect a broader base of home owners that last year’s Hope Now plan. There was a series of criterion that had to be met to qualify for the assistance program. With the new Project Life Line plan, anyone who has defaulted 90 days or more qualifies.

Home prices have been falling and those who borrowed against their equity expecting to sell or refinance now owe more than the worth of their homes. Even those individuals will excellent credit ratings are struggling with high payments. Many adjustable-rate mortgages set up low payment plans for the beginning of repayment, but require higher payments down the line. Since home values have gone down, refinancing would come up short of what borrowers in these situations now owe, and payments still tend to be unmanageable.

With this foreclosure freeze, many borrowers that are in trouble will hopefully be able to work out affordable plans or refinance their mortgages so that they can keep their homes. The six major lenders will be very busy for the next month, as the Project Life Line plan appeals to a broad base of homeowners at this point. Combined with rate cuts and the new fiscal stimulus plan, the rapid increase in the number of foreclosures may slow down. The combination of these positive moves is a step in the right direction.

Investors are still waiting for a definite rise in stocks to result from last week’s surprise rate cuts. It is typically a given that stocks will go up after interest rate reductions, but Wall Street is not yet seeing the desired results. This is rather puzzling considering the fact that the cut was the deepest since the early 1980’s.

The stocks fluctuated last week after the cut. There was some rising on Wednesday and Thursday, yet on Friday, there was another dip. The market still hasn’t rebounded to September levels, when the rate cutting campaign began. There is an FOMC meeting tomorrow and Wednesday, and some are expecting further cuts.

Perhaps the rate cuts just aren’t enough. There are extremely tight credit conditions, and consumers are drowning in debt (foreclosures and all). With consumer spending low, businesses aren’t profiting as much. The effectiveness that we have seen in rate cuts of the past didn’t include these pressing factors, particularly the housing decline which has taken a major toll on market performance overall.

The seemingly hasty move of the aggressive rate cut of 75-basis-points last Tuesday shows as the ‘tell tale’ sign that recession is imminent to some economists. Monetary policy takes time, and the rate cuts may not be enough to stave off recession. The effects of these moves probably won’t translate until after the second quarter. These cuts may slow down the impact and soften the blow, but if recession is coming, cutting rates can’t stop it.

Meanwhile, the global markets are faltering. Asian stocks tumbled 3%-7%. In Europe, major indexes were down about 2%.

Analysts are split, as usual, as to whether or not the Fed has been making the right moves. Some say more aggressive rate cuts earlier would have helped more, while others think that the cuts came too soon. The intent of the FOMC was seemingly preemptive in delaying recession, but also appears highly motivated by market performance rather than economic conditions.

At this week’s meeting, further cuts are expected. They will perhaps make a 25-basis-point reduction. If the FOMC does cut rates, it will probably not be as dramatic as the latest cut.