Confidence May Be Too Low For Fed To Help

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The news that the Fed would buy as much as $300 billion in long-term Treasuries and up to $1.25 trillion of mortgage-backed securities issued by Fannie Mae (FNM) and Freddie Mac (FRE) caused the stock market to rally. But, the rally was modest.

One of the reasons for the comparative lack of enthusiasm about the plan is that it only affects the credit markets and economy if businesses and consumers take advantage of it. There is growing evidence that they won’t.

Even before the Fed’s action, mortgage rates had fallen to 5%. That would seem to be an incentive for home buyers to rush into the market. But, home sales are still moving down and not up. And home prices have shown no sign of recovery. Pushing mortgage rates even lower will not bring buyers into a market that is still deteriorating. Lower rates on credit cards and car loans may trigger a similar reaction. Consumers want to save money, not spend it.

Businesses may face similar roadblocks as  the ones presented by consumers. Sales of everything from clothing at retail to expensive capital goods are still in the slaughter house. Companies which are considering laying off workers are probably not focusing at taking on more debt. Most enterprises still wonder if their sales will pick up this year. Many may not envision an improvement in their business until a year from now, if not longer.

Bringing down interest rates is a clever way to draw borrowers into the market. But, if the magnetism is not coupled with a perception that the economy will take a turn in a quarter or two taking money on credit is not going to become any more attractive than it was before the Fed’s action.

Douglas A. McIntyre