Like the tides, the wave of good feelings that swept over Wall Street and Main Street with the Federal Reserve's big interest rate cut could ebb just as quickly.
Homeowners opening up statements for their adjustable-rate mortgages come next month will experience a jolt when the rates jump, but not as severe a jolt as it could have been.
And, Wall Street's mood swings -- reflecting bouts of panic and then some relief -- are expected to linger.
That is because the Fed's action, while perhaps providing some help, will not cure problems in the ailing housing market, which are still expected to drag well into next year.
It will take time for builders to work off a glut of unsold homes. That means the housing slump will continue to hold back the economy and probably lead to more job cuts in construction, manufacturing and other industries.
The Fed's action also won't stop home foreclosures and late mortgage payments from rising in the months ahead.
In a bold move, Fed Chairman Ben Bernanke and his colleagues on Tuesday sliced a key interest rate by half a percentage point to 4.75 percent. It was the first rate cut in more than four years.
Their aim is to prevent the economy from being thrown into a recession by a housing meltdown and a credit crunch. Lower rates should induce people and businesses to boost spending and investing, which would help energize economic activity.
Wall Street investors were cheered by the move, sending the Dow Jones industrial average zooming 335.97 points. It was the Dow's biggest one-day point jump in nearly five years.
Over the short term, the rate cut can provide an important psychological boost. It could make investors, businesses and others less inclined to clamp down or make drastic changes in their behavior that would hurt the economy.
"This does not heal the financial markets, but it can help in the process of healing. But we're not there yet," said Ken Mayland, economist at ClearView Economics.
The improved mind set, though, could turn out to be fleeting.
"I think the honeymoon is going to be pretty short for the euphoria of this Fed cut," said Greg McBride, senior financial analyst for Bankrate.com. "A half-point cut can only do so much. It doesn't transform the housing market into sunshine and daffodils."
The housing market is suffering through its worst slump in 16 years. Home sales are expected to keep on sagging. Home prices, which saw double-digit gains in many areas during the boom, have cooled off significantly. Affordability is still an issue for would-be home buyers, experts say.
Pain will continue to be felt by borrowers, lenders and investors of "subprime" mortgages -- higher-risk loans made to people with spotty credit or with low incomes.
Analysts estimate that 2 million adjustable-rate mortgages will jump from very low initial teaser rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.
The Fed's action does provide a bit of relief. For owners facing a reset on Oct. 1, their new rate will rise to 6.75 percent, versus 7.50 if it had reset a few months earlier, McBride said.
"The payment is still going up by hundreds of dollars a month. So people are not going to feel warm and fuzzy," he said.
For consumers, whose confidence has been rattled by the housing and credit problems, much turns on whether employment conditions continue to deteriorate.
The economy lost 4,000 jobs last month, the first decline in four years. The unemployment rate, now at 4.6 percent, is expected to climb close to 5 percent by the end of the year. A softening job market eventually will probably mean slower wage growth.
Howard Chernick, economic professor at Hunter College, doesn't think the Fed's rate cut will make people rush to the malls.
"Consumer spending is influenced by employment and wages," Chernick said. "Aside from the euphoria some might now feel, I don't think there is going to be a big effect."
It will take months for the Fed's rate cut to ripple through the economy, with the hope that it will bolster activity.
Analysts expect the economy to slow to a rate of about 2 percent in the current quarter. That would be just half the pace of the previous three months.
FALSE DOCUMENTS? Actor William Liao said he was ‘voluntarily cooperating’ with police after a suspect was accused of helping to produce false medical certificates Police yesterday questioned at least six entertainers amid allegations of evasion of compulsory military service, with Lee Chuan (李銓), a member of boy band Choc7 (超克7), and actor Daniel Chen (陳大天) among those summoned. The New Taipei City District Prosecutors’ Office in January launched an investigation into a group that was allegedly helping men dodge compulsory military service using falsified medical documents. Actor Darren Wang (王大陸) has been accused of being one of the group’s clients. As the investigation expanded, investigators at New Taipei City’s Yonghe Precinct said that other entertainers commissioned the group to obtain false documents. The main suspect, a man surnamed
The government is considering polices to increase rental subsidies for people living in social housing who get married and have children, Premier Cho Jung-tai (卓榮泰) said yesterday. During an interview with the Plain Law Movement (法律白話文) podcast, Cho said that housing prices cannot be brought down overnight without affecting banks and mortgages. Therefore, the government is focusing on providing more aid for young people by taking 3 to 5 percent of urban renewal projects and zone expropriations and using that land for social housing, he said. Single people living in social housing who get married and become parents could obtain 50 percent more
DEMOGRAPHICS: Robotics is the most promising answer to looming labor woes, the long-term care system and national contingency response, an official said Taiwan is to launch a five-year plan to boost the robotics industry in a bid to address labor shortages stemming from a declining and aging population, the Executive Yuan said yesterday. The government approved the initiative, dubbed the Smart Robotics Industry Promotion Plan, via executive order, senior officials told a post-Cabinet meeting news conference in Taipei. Taiwan’s population decline would strain the economy and the nation’s ability to care for vulnerable and elderly people, said Peter Hong (洪樂文), who heads the National Science and Technology Council’s (NSTC) Department of Engineering and Technologies. Projections show that the proportion of Taiwanese 65 or older would
Democracies must remain united in the face of a shifting geopolitical landscape, former president Tsai Ing-wen (蔡英文) told the Copenhagen Democracy Summit on Tuesday, while emphasizing the importance of Taiwan’s security to the world. “Taiwan’s security is essential to regional stability and to defending democratic values amid mounting authoritarianism,” Tsai said at the annual forum in the Danish capital. Noting a “new geopolitical landscape” in which global trade and security face “uncertainty and unpredictability,” Tsai said that democracies must remain united and be more committed to building up resilience together in the face of challenges. Resilience “allows us to absorb shocks, adapt under
RSS