Last week was packed with economic action: the Fed’s rate decision on Tuesday and the earnings reports of Fannie Mae and Freddie Mac stole the spotlight. The Federal Reserve left its benchmark rate unchanged at 2 percent, which was widely expected by the market. The tone of the policy statement was more passive than the one issued after their June meeting as the Fed officials recognized that the downside risks to economic growth are at par with the risk of inflationary pressure. The Fed’s decision to keep interest rates unchanged was greatly facilitated by the fall of commodity prices over the last two weeks.

High energy and food prices result in high inflation, while depressed consumer spending as a result of falling home prices, tight lending standards, and deteriorating job market turn the economy to recession. When we add both sides of the equation the result is stagflation - a state of the economy characterized by high inflation and reduced economic growth. If the fall of energy prices continues at this pace, the inflationary knot around the neck of Ben Bernanke will ease and the policy makers will have to worry only about the recession part of the equation. Keeping the rates low for a long time would be a logical path for the Fed to follow. It would be disastrous for the Fed to raise rates when the economy is facing full-blown credit crises, hundreds of billions of ARMs resetting by the end of 2008, constrained balance sheets of hundreds of banks, and lack of liquidity for trillions of exotic financial products which were created during the last five years of securitization frenzy. Currently, the Fed funds futures are pricing 80 percent, 67 percent and 60 percent probabilities for no change in the overnight rate in their September, October and December meetings respectively.

Back to the oil topic, last week, the crude went down more than 20 percent rom its all time high closing price of $145 a barrel reached at the beginning of July. The fall in oil prices began with the release of reports showing increase in inventories and decreased consumer demand. Within the next few months, we will find out which theory was more valid - the “oil bubble” theory or the “running out of oil” theory. Given the initial year over year 100 percent increase of the oil price and its steep decline of 20 percent in just over a week, the winner so far is the “oil bubble” theory. However, factors such as the rapid change in consumer behavior towards more energy efficient cars and the billions of dollars that are being spent by the auto manufacturers on shifting their production to more gas-efficient cars are largely contributing to the fall in world oil demand. In the meantime, the same Wall Street analysts that were forecasting $200 per barrel of oil by the end of the summer revised their projections faster than Spitzer’s reputation went down the drain.

In the meantime, fixed rates interest rates are holding.  Always remember, that we are available anytime of the day or night for your questions - drop us an email or call the office (561/743-6592) - after hours it goes to the cell.  Peace Out!