Fifty Basis Points and Counting?

The Federal Reserve Board's decision to cut its key short-term interest rate by 50 basis points was meant, clearly, as a lifeline to the troubled mortgage industry. With defaults skyrocketing, especially on subprime credit quality loans, with billions of dollars worth of adjustable-rate mortgage products approaching resets that would sometimes onerously raise monthly payments, the Fed is trying to stave off disaster. The question is will the Fed's vigorous efforts to bolster liquidity for the mortgage industry and the credit markets generally backfire? And is the Fed done cutting rates?

At this point, there's good reason to have confidence in Fed chairman Ben Bernanke's captaining of the ship. When he raised rates early in his term to keep inflation within acceptable limits, some thought he might have gone too far. But with price growth appearing controlled and with housing values falling nationally - sharply in some markets - he was willing to change course and use the Fed's power to minimize the risk that a weak housing sector could plunge the economy into recession. So far so good, especially for homeowners who are trying to refinance out of problematic loan products before their payments get too high.

But the Fed rate cut comes with plenty of risk for mortgage servicers, because the same actions designed to limit payment increases and keep housing finance affordable could spark another refinancing binge. And while most applauded the Fed's decision to cut interest rates by 50 basis points, the move was not without its detractors.

As The Wall Street Journal pointed out, only a month before the rate cut the Fed said it was more worried about higher inflation than weaker economic growth. Allan Meltzer, a professor at Carnegie Mellon University, was quoted in the Journal saying that the rate cut was a mistake, similar to cuts in the 1960s and 1970s that allowed inflation to ratchet up.

But sometime between August and September, the Fed's view toward housing grew more ...