Lending Tree Fed Economist Predicts Half-Percent Rate Cut

On Friday, LendingTree, LLC announced that its Chief Economist Jim Svinth forecasts a rate decrease of 50 basis points at the next Federal Open Market Committee meeting on December 11th, which would mark the third interest rate cut of 2007.

"The Fed will in all likelihood drop the target Fed Funds rate by .50% at the December 11 meeting...lowering rates by only .25% is simply not enough. Recent comments made by Fed members indicate they understand the current risks and therefore will take further action on Tuesday with a drop of .50%."

Such action would mean that the central bank lowers its overnight lending rate to 4%.

However, on Friday the U.S. Labor Department announced that more new jobs had been created in November than many economists had predicted, leading many of them to feel that consumption could keep the economy stronger than has been anticipated and might as a result completely avoid even a short recession. Average hourly wages were also up by 0.5%.

The better- than-expected statistics mean that the Fed's decision on interest rates won't be clear, but at the same time the central bank has the leeway to do pretty much as it pleases in the wake of the good news. Many economists still predict a quarter-point rate cut to 4.25%

However, it was also announced yesterday by the Fed that Americans lost $128 billion in home equity value in 2007 because of the housing market bust.

Ten-year Treasury note yields rose 9 basis points, or 0.09 percentage point, to 4.11 percent at 12:47 p.m. in New York as fewer investors anticipated the half-percent rate cut. Futures contracts indicated that investors now feel that there is only a 26% chance of seeing the half-percent rate cut. Yesterday's close indicated that investors then felt there was a 36% chance.

In contrast to Svinth, most economists and investors do not think that the Fed will enact a half-percent slash.

The news and speculation come in the wake of an announced Bush Administration plan to freeze interest rates on adjustable rate mortgages for the next five years to certain homeowners who are deemed at high risk of foreclosure.

The plan is receiving tremendous skepticism and more than a little outrage from the great majority of economists and investors, as well as those homeowners who would in essence be punished because they make their payments on time or are in no foreclosure jeopardy.

The deal between the White House and some lenders means that trillions of dollars that Wall Street investors had contracted to be paid would be delayed or never realized.

Some critics have stated that the plan is ill-advised because in addition to removing or diminishing the need for personal responsibility when taking out a loan or considering buying a house, the action would reduce confidence in U.S. bond and mortgage markets and cause higher interest rates for everyone in the future.

What's more, critics say that this sets a very unhealthy precedent for arbitrary government control of interest rates and business contracts, and add that the socialistic move will likely lead to vastly worst liquidity problems in the future due to the violation of the sanctity of voluntary business contracts.

Original Newswire Source:
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