<<< If the Fed drops interest rates it is a result of the employment numbers, weakening economic data coupled with tame inflation. The long overdue housing correction adjusting price growth to income and other assets is similarly exerting a negative wealth effect on spending. I disagree that a Fed rate drop will bail out the over zealous lenders and overextended buyers. Both of these groups will be part of the corrective process. It will ease some of the pressure on the commercial paper market financing inflated buyouts which in my opinion is most regrettable but all in all a rate reduction is prudent macroeconomic policy. >>>
My thoughts....
The Fed won't be dropping rates because of one negative month of payroll numbers or one month of weakening economic data. The unemployment rate is what 4.4%? Inflation is definitely not tame where I life but maybe you don't have a car or eat (with wheat and milk at all time high's). Also, export prices are rising as costs in China are rising and the dollar weak. None of the economic numbers announced would have pushed any previous Fed to cut rates. The Fed will cut rates (only 25 bps, IMO) because the Government wants it. It won't help the housing market materially as its a supply/demand issue - how many homes can one person really own? The supply of homes will reach at least a 12 month supply (up from 9.6 months today) before reversing its trend. The cost of a mortgage has gone up regardless of what the Fed does and that will keep housing demand down until housing prices correct another 15-20%.
With respect to leveraged buyouts, the entire market has changed and I don't see how lower rates are going to convince banks to open up their wallets and hand out more cheap debt. Banks are once again putting covenants in financing agreements and I think they've learned their lessons to not finance the pipe dreams of PE firms. My largest private equity clients are currently having trouble closing financing on $100 million deals. This will change however, financing of $10+ billion deals will be a thing of the past.
It should an interesting week....
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