The Bernanke Put

Yesterday the FOMC cut the Fed funds rate and the discount rate 1/2 point, or 50 basis points. Wall Street went nuts, with a one day gain of over 300 points in the NYSE. There was yelling and trading and a good time was had by all.

Yesterday was followed by today's trading with what looks like a another rise, with the Dow in triple digit gain for much of the day but falling off to a gain of 76 at close of trading.

Party on, Wall Street!

American consumers will not see tangible benefits for a few months, with lenders expecting to reduce interest rates modestly, with credit card holders saving maybe $25 per year in interest costs, and adjustable mortgage rate hikes dropping back a little.

Honestly, if individuals were in trouble before the rate cuts, they will likely remain in trouble. For those who weren't in trouble before the cut, they will be paying a little less in interest, but not appreciably so.

The rate cut was a macro-move that bailed out high-end players in the economy, at least for a while. It's a reprieve, not a salvation. Think of it as a little breathing room as the market tries to re-allocate risk of too much money in the system offered to too many people who couldn't handle repayment over the long-term. For the housing market, there is little direct relief.

Mr. Bernanke and the Federal Reserve have told the economy that they will kick the excess can down the road and will deal with it later. In the meantime, the dollar valuation has cheapened about 10% in the last month, the Canadian dollar is at par and rising against the USD, foreign investment in the US continues a sharp decline, and foreign banks are dumping Treasuries at a faster rate. That can't be a good combination.

I expect that the Fed will continue to reduce interest rates another half or three-quarters of a point over the next four or five months in a continuing effort to shore up the economy. However, there are forces building that indicate inflation will rise, thus forcing up interest rates at about six to eight months. There will be a huge rise at that time.

At least that's the view from here right now.

We have a fairly narrow window for home purchases as interest rates are at good lows, particularly for conforming loans under $417,000. For those who want to wait for housing prices to collapse, they may see that eventually, but that will be when interest rates rise so high and that they quickly erode most people's purchasing power.

We are indeed in a golden time for buyers right now: low interest rates, high housing inventories, and fear and/or distress among some sellers. For now the indication is Buy-Buy-Buy if you want to buy within the next few years. Now. Right now is the right time. If you wait, you will likely lose. Or in other words, you will remain renters.

For sellers, it is also the time to Sell-Sell-Sell. Why? We are in that same window of opportunity. Wait and home prices will drop as interest rates bounce quickly higher on inflation fears. Interest rates will get higher than buyers can afford, and with more foreclosures coming on the market, home prices will drop and when that local trickle become a flood, they will drop fast.

Yes, the Fed has given a little breathing room. But it is not a lot of room. The time to act is now. Renters: become buyers while you can still afford to buy. Sellers, get serious. Get it done.

Party on, Wall Street! But it is Last Call!