Have Bernanke and Buddies Gone Bonkers?

 By now you have heard that the Fed hit the panic button and cut rates a drastic 75bp.  It is quite obvious that the Fed is more concerned with the stock market crashing and quenching fears than they are in fighting inflation.  All they have succeeded in today is devaluing the dollar even further and fueling stagflation even further.

One good thing about this move is that those holding ARMs (adjustable rate mortgages) tied to LIBOR and MTA will likely be seeing drops in their fully indexed rates, going back to the question most have avoided; should ARM holders really be rushing to get into a fixed rate loan?

With fear running rampant in the markets on both sides, we can through logic and reason out the window.  However, since stocks are in a freefall, bonds keep rallying as traders scramble to find a safe place for their money.  Chances are they will be surprised at the end of the month when the PCE is released and inflation pulls the rug out from under bonds.

Also, keep in mind that since the Fed doesn’t control mortgage rates (only indirectly controls ARM indices), mortgage rates may not go down much more before turning back toward the sky.  All indications, and fundamentals, show this is a “fear rally” and bonds should fall, sending mortgage rates higher soon.

One thing we can anticipate is now that Pandora’s Box has been opened, inflation can run freely even in a slowing economy.  With the Fed’s determination to flood the markets with money, both real and perceived (credit), the dollar will continue its decline into oblivion and costs will rise as we have already seen.  That panic button may end up being the nuclear weapon that ultimate sends the economy into Armageddon.