Where, oh where, will the interest rates be?

Today, the Bank of England has reduced the UK interest rates from 5.75% to 5.5%. There has not been a rate reduction there since August of 2005. This rate cut comes as their economy has been showing signs of a slowdown. Their anticipation of this cut is to prevent the slowdown from getting out of control. The European Central Bank held its benchmark of 4% despite the growing Euro and rising inflation there. Although, they are keeping a close eye on the U.S. and its subprime mortgage situation and its continued effects on the overall marketplace. All of this comes in line with expectations that a rate cut is due the U.S. for the same reasons.

With the oil pricing and food cost increases with the European community of 315 Million consumers has left a wake of concern as inflationary fears continue there. This created a delicate decision process for the Bank of England. Though this should stave off some of the growing fears and stabilize consumer confidence as surveys there show housing prices to be falling.

United States Treasury Secretary Paulson issued a statement today claiming confidence in the Government's discussions with Banks to agree on a plan to lock in rates on the millions of upcoming teaser loan rate increases. Fannie Mae CEO, Mudd, said that the cap on ARM's should last for at least two to three years. Many of these loans begin at rates of 7-9 percent, or less in some cases and are expected to reset to 11-13 percent. All of these new rate locks are aimed at keeping people in their homes. It was noted that the borrowers with steady incomes and relatively clean payment histories will be the focus of the restructuring deal. The overall public concern on this issue is the backlash that may be created through which economic demographic will benefit the most from this restructuring plan. There are numerous fears that the lower income first time home buyer may get left out of the picture.

Paulson has identified four categories of subprime borrowers to focus on in coming to these tough decisions. There are those who can afford to pay adjustable-rate loans; those who don't have the financial wherewithal to sustain home ownership; those who choose to refinance their mortgages which he called "the first, best option" and those who can afford the introductory rate but not the adjusted one. The government seems focused on helping the last category.

Despite all of this confusion and concern the Treasury Chief remained adamant that while the housing recession and credit crunch will impose restrictions of the U.S. economic growth, he maintains, as do we, that the economy remains sound. The fundamentals are stable with continued job gains, healthy corporate balance sheets, rising exports, and a newly reduced oil pricing are easing some consumer fears as well.

We feel that despite these ups and downs the strength of the fundamentals of the dollar will be reflected in foreign exchange markets. As we have discussed previously, the dollar is widely held throughout the world as a reserve that this holds weight to the stability of the currency as a whole. There should certainly be discussions throughout this economic slowdown on a global scale as to create new measures of inflationary protections for all. This may mean getting back to a gold standard for a better balance to the overall board.