December Interest Rate Cut Carved in Stone

The bond market is experiencing a rally it hasn’t seen in years:

The popular U.S. two-year Treasury note is trading below three percent for the first time since December 2004. Meanwhile, the benchmark 10-year U.S. Treasury note is trading at 3.94% — its lowest level since September 2005.

Treasury notes rally when interest rates are expected to decline. And that is exactly what’s going to happen. According to Bloomberg, more than 90% of interest-rate futures traders expect the U.S. Fed to lower rates on December 11, 2007. The coming cut in rates is the closest you can get to a sure thing. On December 11, expect the Fed to decrease interest rates for the third time this year to 4.25%.

As I have been predicting, the U.S. economy will come to a screeching halt in 2008. The U.S. Federal Reserve recently cut its economic growth forecast for 2008 to a meager 1.8% — a number that I believe is still far too optimistic.

First the housing bubble burst… then the credit bubble burst. American consumes are seeing the equity in their homes decline rapidly. Banks are experiencing losses related to the housing carnage. And consumers who got in over-their-heads with big mortgages they could not afford in the first place can’t refinance out, nor can they sell, as the buyers are drying up in an environment where financing is getting more difficult to obtain every passing day. Ample financing for marginally creditworthy potential homebuyers causes demand for homes — no financing availability for the same group obviously reduces demand for homes.

I predicted in 2005 that Wall Street would totally miss the boat on just how damaging the housing downturn would be in the United States. My expectation is that interest rates will likely fall a lot further in 2008, as the Fed attempts to fend off the inevitable recession headed our way.

NEWSFLASH — Former Fed Chairman Alan Greenspan says we haven’t seen the bottom in the housing market yet. Are you kidding? Isn’t this the same guy that originally said the softening housing market would not affect the rest of the economy? Now Greenspan is saying that we are witnessing the worst housing slump in 50 years and it is poised to get worse. Greenspan was clearly wrong on his initial opinion of the effects of a soft housing market on the economy. Someone should finally tell him his ridiculously decreased interest rate policy was what caused the housing boom and the eventual bust we are experiencing today.