The Fed is finished

lowering interest rates. Testifying before the Joint Economic Committee yesterday, Fed Chairman Bernanke said he would support raising the loan limit on conforming jumbo mortgages from the current $417,000 to $1 million. Bernanke suggested that the government-sponsored entities (GSEs), Fannie Mae (FNM) and Freddie Mac (FRE) could pay insurance premiums on the jumbo loans to the federal government. The government would “act as guarantor” by taking on some of the credit risk.

What does this have to do with my assertion that the Fed is done lowering rates? Bernanke is passing the job of increasing mortgage liquidity to the GSEs. By doing this, Bernanke is saying that the Fed’s tools are too blunt and a more targeted approach is required.

The Fed’s September 18 and October 31 rate cuts have:

  • Created more inflation.
  • The liquidity created by the cuts has gone straight to Treasuries in the “flight to quality”.
  • The money that entered the stockmarket since September 18 has exited. The DJIA and the S&P500 are lower, and the NASDAQ is only about 115 points higher.

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