Wednesday, January 23, 2008

Feds Cut Rates...

The Federal Reserve cut interest rates yesterday by 3/4 of a point. That's a rather large cut. The cuts applied to prime, which impacts how much people pay interest on CC, auto loans, home equity lines of credit, etc. There is speculation about what the Federal Reserve will do at it's normal meeting at the end of the month.

This cut was a direct action against the falling international markets which occurred on Monday, which most of the US had off due to Martin Luther King's Jr. holiday. The Federal Reserve decided to cut rates to stabilize the US market among worries of a recession.

This cut allowed the Dow to only lose 129, after dropping 400 pts in the early morning of Tuesday trading. Also key worries is if the Federal Reserve cuts too much it will impact the inflation worries already present in today's economy.

Should we be worried? What can we do to weather this storm?

I'd say don't look at your investments. Leave everything alone and don't follow market trends. The fastest way people lose money is chasing hot stocks and selling following a bad day in the market. Basically people who are trying to time the market, but instead of doing it based on facts, are using emotions.

Right now the best thing you can do is try to live within your means. With the impending credit crunch, now would not be a good time to get too much car or too much house. Sure rates are low, and car companies and homes are offering awesome incentives. But can you really afford it?

Yes the $500 car payment sounds great @ 0% interest financing, but it's still $500/month payment. What happens if you lose your job due to a recession? Or if you have to increase your food, gas, utilities by $500/month because of inflation?

Getting out of a ARM might also become feasible. Yes housing prices have dropped in SOME areas, but rates might start trending lower and already have from this summer. It will take some time for the interest rate cuts to have an effect on the 10 year treasury bill (which most mortgages are based on, or LIBOR), however you can start investigating now.

Another way is keep investing in your 401k and IRA. Now is not the time to stop. Dollar cost averaging will help smooth out these rough bumps. Shut your eyes and keep moving ahead. I'm dying to jump back into the market with more money.

But for now, keep on watching the market without panic or fear.

2 comments:

Ryan said...

In response to your comment regarding stocks. This is the best time to buy. Many people look at the news and tv and hear "recession" and think it equals move everything out of investments. This couldn't be further than the truth. Right now you are look at big names such as Cat, McDonald's, etc. who are excellent companies who are getting caught in the storm. You might take it on the chin if you buy in this week, but look at the bigger picture. Won't you feel glad you bought those stocks at such cheap prices.

I'm Grace. said...

I completely agree with you, both as to "not looking" at one's accounts right now, and to continuing to contribute monthly. I do both. But it IS a little stomach-churning to read/see the news. Maybe I'll stick to novels and American Idol for awhile