The case for 2-1/4
Submitted by Econbrowser
The Federal Open Market Committee’s next meeting is scheduled for April 29/30, which the May fed funds futures contract currently anticipates will result in another 25-basis-point reduction in the target fed funds rate down to 2.0%. Here’s why I hope the Fed doesn’t do that.
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No matter how dire your outlook for the real economy may be, the first question that must be asked is, How much benefit could another 1/4-point cut provide? For home purchases, for example, the expected change in house prices and income over the next 12 months is likely to be a more important factor than the interest rate in the current environment. And even if the interest rate were the most important variable, it’s not clear how much a 1/4-point reduction in the fed funds rate would actually matter for the cost of borrowing. For example, over the last six months, the Fed has cut the target by 250 basis points, while the cost of a 30-year jumbo mortgage rose 60 basis points. That’s if you can still get the jumbo loan, which you may well not.
