"Intersting article but I did not understand the last paragrph. why would neg-arm get a short term slowing - because LIBOR rates are coming down ? But the reset pushes up way above the current teaser rate ?"

For OptionARM, teaser period is only like 1-3 mths. Most of them are already out of that period, so they're already paying fully-indexed rate. LIBOR going down will help them. MTA/COFI OA will get relief too although slower (since those are lagging indexes)

Forgive me for being an ARM noob, but I don't understand the examples you gave for the ARM rate adjustments.

I understand 3/1 - the rate adjusts once per year after the first 3 years. Simple enough. But you say 2/28 means adjust every six months after the first two years. How does "28" end up meaning six months?

The Fed just cut the Discount Rate by 50 bps to 5.75%. Funds rate unchanged. The statement from the FOMC indicates the move will persist as long as liquitidy is a problem.

For immediate release

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Liquitidy? Oh, you know what I meant.

Ah, the discount window is different from the Fed funds rate (5.25%). For a moment, I felt as though my chocolate ration had been doubled again.

The Dicount Window is available but, as I understand it, banks are loath to use it as a source of borrowed funds because it suggests that the particular bank is in deep trouble.

So the Discount Window is rarely used meaning this is mostly symbolic i.e. an "I feel your pain" statement by the FED.

As Tennis8 suggests, the discount window is the last source of funds for banks suffering for illiquidity. So you can borrow, but there's a penalty rate of interest to dissuade lenders from abusing it (in reality, banks don't like to use it, because it signals real problems - the perception can aggravate a run)

does this fed cut in anyway mean i can refi my fixed to a lower rate by half a percent?

It will be intesting to see which banks use the discount window. It probably won't do much good for their stock prices.

but tanta

doesnt the fed usually lower the target rate eventually which will effect what banks lend to each other which would lead joes like me with a refi

cant we assume a target reduction is in the future

Want an anecdotal observation that the good old boy knew about this rate cut in advance, check this out from Bloomberg:

Fed Cuts Discount Rate to 5.75% to Ease Credit Crunch (Update2) - Bloomberg.com

Since Bernanke delivered his economic outlook on July 18, the Standard & Poor’s 500 Index has fallen x.x percent through yesterday, the dollar is trading near record lows against the euro, and even crude oil prices have slid on forecasts of weaker U.S. demand.

They couldn't do the math this morning ? x.x percent was to be filled in later and someone forgot!

Don't bother clicking the link; they updated it before I could link to it. I have a saved PDF version of the original though.

quick! somebody sell me an IO strip and start doing some loan mods!

I have some really good paper I want to exchange for a few million bucks who do I call.

Jack-

"They couldn't do the math this morning ? x.x percent was to be filled in later and someone forgot!"

That's just silly conspiracy nonsense. I've written hundreds of stories and filled in figures at the last moment because you want to use the latest figures. It's easy to forget, and sometimes harried editors miss things.

So let me get this straight. Wink, nod, rally 300+, Fed drops pants, rally 300+ - all < 1 trading hour.

Mr. Poole, meet Mr. Paulson

(quote)
Aug. 17 (Bloomberg) -- Goldman Sachs Group Inc. said the Federal Reserve will cut the overnight target interest rate to 4.5 percent from 5.25 percent this year, citing ``sharp tightening in financial conditions'' and expectations the economy will slow.

The Fed will reduce the rate by at least 0.25 point on or before policy makers meet on Sept. 18, economists led by Jan Hatzius and Ed McKelvey in New York forecast in a note today before the central bank reduced its discount rate.

The Fed will cut another 50 basis points after that, possible at the next two meetings in October and December, McKelvey said in an interview. The Fed today cut the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.

(end quote)

Oh the ARMS folks are going to get killed...look at those rates rise....good bye housing...hello 40% price cuts.

The discount rate ease works if nobody has to use the window. To the extent that bank A understands bank B has readier (cheaper) access to alternative borrowing, bank A is going to be more willing to provide short-term credit to bank B in the interbank market. In addition, to the extent that bank A realizes coming up short because it lent to bank B is now less expensive because bank A also has a cheaper source of alternative funding, there is additional reason to lend to bank B. Think in terms of opportunity cost. The interbank market should become more liquid because the cost of making a mistake is now lower. Is there a stigma to resorting to the discount window? Heck, I suppose so, but if there is, the stigma didn't get any bigger, and the borrowing rate got smaller, so the analysis doesn't change.

Told ya so.
You wouldn't listen;
"They can't because of inflation"
"They can't because it will weaken dollar"
"They wont until the economy weakens more"

I Told you this had potential systemic issues and needed to be done.

SloMo,

Just wait. Somebody is going to see the slide in the long end of the Treasury curve and say it happened because the Fed caved in and will now allow run-away inflation. In that little world, there is one and only one implication from higher long-end rates.

And stop crowing. It isn't dignified.

Kett82,

Thumping ain't misleadin' iffen ya know how ta listen! And there ain't no lazer in the world thet kin test a melon good as a Barlow knife!

FED has just lost all of its credibility. 10 DAYS ago(!!) the biggest threat was inflation,now it suddenly is recession.And because they do not have credibility anymore, a recession will come by September.Rate cuts will not help, the lack of credibility is more important thing.