Fed Cuts Interest Rate
The Federal Reserve cut a key short term interest rate, the federal funds rate, to 4.25% today. The central bank also cut the discount rate to 4.75% in an attempt to encourage lenders to borrow from the Fed to keep up their lending to consumers.
This is the third consecutive meeting at which the Federal Reserve Bank has cut interest rates since August and appears to be an admission by the Fed that inflation is not the biggest problem our economy faces at this time.
The most recent jobs report shows that job growth has been sufficient to maintain moderate growth for the overall economy. Strong U.S. exports (the bright side of a weaker dollar) are helping to create more jobs. Real gross domestic product growth through the first three quarters of 2007 averaged 3.1%. The only real drag on the economy is the housing sector but I would submit that we are in a natural cycle of the real estate market, that had gone too high aided by an adjustable rate mortgage frenzy.
This too shall pass. We have already seen signs that the real estate market here in Maine is adjusting to the new reality, i.e. lower prices. As long as banks are lending, people will be buying. Although it is a painful time to be a seller, the majority of those sellers become buyers just as soon as they sign a purchase and sale contract on their present home. A few years from now some people will be telling their friends "...I got this house for only (fill in the blank) in '07". Others will ruefully say "...do you know what I could have had that property for in '07?" Which will you be?
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