Despite Housing Recession, Fed Stays Put

"Liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." Now that would have been a wild statement from the Federal Reserve. Actually, it's a famous quote from Andrew Mellon, U.S. Treasury secretary as the Great Depression was beginning.

Today's actual statement from the Fed's policy committee was far more subdued as it explained why it was leaving interest rates alone yet again—despite the ongoing housing recession and troubles in the subprime loan market. It read, in part: "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."

In short, the real estate market stinks, but no overall economic recession. Yet to strapped homeowners who would benefit greatly from a rate drop in their adjustable rate mortgages, the Fed statement probably sounds a lot like a Mellonesque "You're on your own." Probably sounds the same to some on Wall Street like money manager and CNBC host Jim Cramer, who recently said that it was "Armageddon" in the fixed-income markets and that the Fed needs to immediately cut short-term interest rates. But Bernanke & Co. don't seem likely to cut rates anytime soon. As MKM Partners economist Michael Darda puts it:

The [Fed] doesn't appear willing to trade anchored inflation expectations for subprime loan bailouts or to prevent the stock market from experiencing periodic corrections. The Fed is on hold with a slight upward bias to rates in place until or unless conditions change enough for the Fed to make more significant changes to its outlook for growth.

The economics team at Bear Stearns has a similar view:

The Fed's statement makes it clear that, while it is paying attention to recent financial market turmoil, its essential judgments about the outlook for growth and inflation are unchanged. Although the policy paragraph was softened slightly by the addition of downside risks to growth, the Fed remains focused on the risk of higher inflation, and that future policy adjustments will depend on the incoming data on growth and inflation.