This morning we got blindsided by the Fed. Over the past 6 months this would be undoubtedly bad news, but today they got it right. They got creative. Their solution involves allowing banks (mainly investment banks) to borrow money for 28 days using their mortgage-backed securities as collateral. This solution will help bring liquidity back to the system more than a rate cut would have. A rate cut is like blanket bombing, it affects the whole economy. Further rate cuts could create a serious inflation problem just months down the road. The Fed's new program is much more precise, which is exactly what we need. It helps to fix the mortgage-bond market. However, don't feel like were out of the woods. As long as house price depreciation continues... we'll be in big trouble.
For today, the Fed did phenomenally to address our problems at their core by using a much more creative and precise solution than they have previously.
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