Amount, Timing of Interest Rate Cut Surprises Experts

COLLEGE STATION, Tex. – Experts with the Real Estate Center at Texas A&M University expected the federal funds rate to be cut, but they did not expect it to happen so soon or to be cut by so much.

"It reinforces the notion that the economy is either in or teetering on the brink of a recession," said Dr. Jim Gaines, a research economist with the Center. "It will be interesting to see if comparable rates around the world are also lowered. If not, the value of the dollar could fall even further."

The Fed cut the federal funds rate, the interest that banks charge each other on overnight loans, from 4.25 to 3.5 percent. This marks the biggest one-day move by the central bank in recent memory.

According to a brief statement released by the Fed earlier this week, the rate was cut “in view of a weakening of the economic outlook and increasing downside risks to growth.”

Mark Dotzour, the Center’s chief economist, said he does not think the rate cut alone will be enough to make a difference.

“The cut is a welcome first step, but it doesn’t address the main problem, which is the price of gas,” he said. “Three dollars per gallon is sucking the life out of the American consumer. The more money they put into their gas tanks, the less they have to spend in other areas.”

Dotzour said the Feds need to cut short-term interest rates down to 3 percent, and quickly. They also need to restore confidence in the prime mortgage market.

“The spread between the mortgage rate and treasury rate is exceptionally high,” he said.

Dotzour said if the treasury department guaranteed Fannie Mae and Freddie Mac bonds, the spread would be lowered from 2 percent to the more normal level of 1.5 percent.

This is the fourth rate cut since September. The Fed cut the funds rate by a half-point in September and then by smaller quarter-point moves in October and December.

The Real Estate Center has been providing solutions through research for 35 years. Funded primarily by Texas real estate licensee fees, the Center was created by the state legislature to meet the needs of many audiences, including the real estate industry, instructors, researchers and the general public.

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