Here is the ZT from a Banker:
Been a good afternoon for all of us; better than we could
have hoped for in fact. In a more aggressive move than
was generally expected, the Fed cut the discount rate and
funds rate by 50 basis points in a unanimous 10-0 vote.
We’ve been getting a few questions about what this actually
means. So, we did some brain storming over here and
here’s what we came up with.
The action and commentary by the Fed this afternoon will
clearly inject some liquidity into this market.
Prime lower, LIBOR lower, the curve steeper, ARM reset
risk lower, net interest margin higher, Mortgage Backed
Securities spreads tighter, all good things for mortgages.
Banks originators should have an easier time unloading
loans as leveraged businesses also benefit from the move.
MBS are screaming this afternoon, as Gold/Fannie 5.5s
are almost a ½ point tighter to the curve.
My sense is Jumbo-A spreads will follow suit; especially
as some liquidity returns and the steeper curve widens
Net interest margin. Indicative levels suggest
that 3 month LIBOR will open tomorrow at around 5.21%.
Even though today’s announcement sent a major shock
through the capital markets, we don’t think this sets
the stage for future rate cuts.
In fact, knowing that the Fed went with a 50bps cut,
instead of 25, suggests further rate cuts will be
dependent on the economic outlook. We have doubts
that the Fed will cut again this year; of course
that’s contingent on what unfolds in the coming weeks.
Keep in mind, by focusing on the short-term economic
risks, the Fed can’t simply ignore long-term inflation
pressure. In the wake of this announcement, gold prices
have hit a 27yr high and crude busted through $80 per barrel.
I, for one, am happy to have them worry about that later.
