Over the past week, Fed governors and other officials involved with the FOMC have stated they have very little confidence that the US can avoid a recession. The official definition of a recession requires two quarters of negative growth. If the Fed isn’t certain about the US avoiding a recession, why the heavy rate cuts with the possibility of inflation increasing?
Most mortgages taken out during the housing boom were executed in or around 2005. Why is that important? From what I can tell, most folks around that time took out what’s known as a 3/1 ARM, or adjustable rate mortgage. In other words, after 3 years, every year after the initial 3 year period, mortgage rate for that contract will adjust. By the Fed cutting interest rates dramatically, I think they’re essentially bailing out those who jumped into the 3/1 ARM for whatever reason. Granted, some hard working folks may have just gotten in over their heads and could use the extra year to either relocate or refinance. But my guess is the majority of those benefiting are the real estate speculators. Why is it that people which took a chance on an investment are being bailed out? You don’t see that happening with investors on Wall Street or any other investment vehicles.
In any event, futures are down this morning from more comments from Fed officials about the potential for a recession. I’ll probably sit the rest of the week out since the markets have been extremely choppy as of late but it’s hard to resist taking at least one trade.