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| Adrian Mastracci, president
of fee-only KCM Wealth Management, says "The
rationale for the latest interest rate cut
was that the economy's momentum is slowing.
Not because things are going well." |
For Immediate Release
Vancouver, B.C. (November 8, 2002):
Some experts have been touting the wisdom of the
latest ½ percent interest rate cut from
the US Federal Reserve. As we know only too well,
there are two sides to every story.
Adrian Mastracci, investment counsel with Vancouver's
fee-only KCM Wealth Management, comments, “The
rationale for the latest interest rate cut was
that the economy's momentum is slowing. Not because
things are going well.”
"The other argument is that the Fed's monetary
policy only has 1.25% room left. That is precious
little amount of wiggle room," notes Mastracci,
"The real question is whether the interest
rate cut was warranted at all. But we'll leave
that heated debate for another day."
“It will take six to nine months before
the effect of this cut is actually felt by the
economy,” indicates Mastracci, “So,
we should not expect great strides to be made
quickly. Especially during the all important Christmas
retail season.”
Mastracci adds, “In reality, the Christmas
season is more affected by the West Coast ports
shut down than by the latest monetary policy.
And by the fact that the US shopping season is
shorter because of fewer days to Christmas after
their Thanksgiving holiday.”
“One segment of the population that we
call ‘savers’ is clearly not rejoicing.
The prospects of lower income from short-term
instruments, like Treasury bills, makes them shiver,”
says Mastracci, “For someone who is retired,
the reduction of income from the nest egg is already
painfully evident.”
“Yes, borrowers can look forward to low
interest rates in the short-term,” observes
Mastracci, “However, anyone with a mortgage
should look beyond the short-term and determine
what is affordable when interest rates ultimately
do rise.”
“We have already experienced a rise in
US personal bankruptcies and mortgage arrears,”
points out Mastracci, “All during a climate
of low interest rates.”
“Consumers and borrowers get lulled into
a false sense of security with the low interest
rates,” explains Mastracci, “However,
there will be of day of reckoning when the economy
picks up and rates start rising. Especially, for
those that overindulge on cheap credit based on
prime.”
“Speaking of credit, it grew in September
by 9.9 Billion US,” notes Mastracci, ”It’s
great for the economy. But I wonder about the
overloaded borrowers being able to carry such
burdens for extended periods of time.”
“One area that is not likely to change
is credit card rates. They continue unabated at
high levels,” explains Mastracci, “The
early signs are there. Some of the US credit card
issuers have already reported provisions for higher
loan losses.”
“We still have reasonable economic activity
under the circumstances,” notes Mastracci,
“But we have storm clouds on the horizon
which we have to deal with, sooner or later.”
“Sustainable economic activity will begin
to return when business capital spending starts
to rise again,” says Mastracci, “Until
then, some volatility is likely in the cards.”
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