In the past, I have never commented on the prediction of economists; however, given the turbulence of the stock market, I thought I would try to summarize Mr. Hymen’s thoughts. Mr. Hymen over the last thirty years has been one of the most respected Wall Street Economists, with a terrific record for predicting economic data and stock market performance.
Mr. Hymen feels that the Federal Reserve will cut the Federal Funds rate over the next five quarters to 4%. He expects the first cut to take place in September. Until now, the Federal Reserve has focused on reducing inflation, and has raised rates significantly over the past few years to achieve that objective. Today, the Federal Reserve has a more pressing challenge—preventing the economy from falling into a recession, and limiting the fall out from sub prime loans and the logjam created by the inability of Wall Street to distribute junk bond loans used to finance leveraged equity takeouts.
Hymen mentioned that historically, monetary policy works slowly; that is, the impact of Federal Reserve easing will not benefit the business cycle for probably nine months. Thus, one can expect weak earnings and slow growth rates through the rest of 2007. Stated differently, the economy and business earnings should not show significant strength until 2008. The equities of the finance sector that has performed miserably in 2007 should benefit significantly from a decline in interest rates over the next eighteen months. Furthermore, Hymen is quite bullish about the stock market. While he was surprised by its recent declines, he feels that the stock market will respond favorably to improving outlook for the economy in 2008 and 2009.
Hymen feels that the Federal Reserve is paying close attention to the problems in the business community and its recent decision to cut the discount rate was the first step in its accommodating Main street.
Lastly, Hymen did not touch upon some of the specifics of the enormous problem facing the housing market. That is, over $50 Billion dollars of variable mortgages will start to rise significantly unless overall interest rates drop dramatically. That is, many of the adjustable mortgages were fixed for the first few years, and then varied according to benchmark money market rates. Since the Federal Reserve funds rate has risen from 2% to 5.25% over the past few years, the rates on these loans should rise significantly once the fixed rate period lapses. Stated differently, unless the Federal Fund rates drop let us say 75 to 100 basis points, these adjustable rate mortgages will rise, causing economic hardship to millions of homeowners.
Originally published in the Sarasota Herald-Tribune
