U.S. Fed on the Offensive

Fed The U.S. Federal Reserve cut it’s discount rate 1/4% yesterday (on a Sunday!). That almost never happens.  They’re hoping the move keeps the U.S. credit crisis from spinning “out of control,” as Reuters puts it.

With market confidence sinking–sparked anew by the Bear Sterns debacle–many (BMO, Goldman Sachs, Citigroup, etc.) now expect the U.S. Federal Reserve to cut it’s key overnight lending rate up to 1.00% tomorrow.

As for the Bank of Canada, they will set their rates independently of the U.S. Fed, says Governor Mark Carney. That means the BoC will probably cut less aggressively at it’s April 22 meeting–but who knows in this turbulent market.

As of this writing, the 5-year bond yield has fallen to a new multi-decade low of 2.74%.  The 5-year fixed/5-year bond spread is now a stratospheric 4.55%.  (About 2.50% is typical.)  That means fixed-rate mortgagors are paying far more interest than they would in normal circumstances.

When will fixed rates improve?  No one knows.  We want to believe that spreads will narrow soon and fixed rates will fall, but there is absolutely no indication of when that will happen.

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