The Federal Reserve Board made a stunning and welcome announcement this morning, reversing yesterday’s sickly display put on by the markets.  In effect, the Fed announced that they would lend up to $200 billion in treasury securities through its primary dealers, enabling banks and other participants to find short term liquidity for their relatively illiquid mortgage back securities.  The news has been well received by Wall Street for most of the day with many of the major indices currently up almost 3%.  

Hopefully, this action will help mortgage rates to fall back down.  Following the surprise rate cuts last month, mortgage rates initially followed suit but then spiked back up as the credit crisis accelerated.   It is interesting to note that this rise wasn’t due to rising inflation expectations as embedded in TIPs spreads or as might be supposed by sky-rocketing commodities prices, but due to a complete freezing of the mortgage related and other credit markets.  

Lower mortgage rates should help stabilize the housing and financial markets so that the workout specialists can continue their heavy lifting.  If they stay lower, we suspect that the beleaguered consumer will find a reprieve and that the dangers of a recession brought on by a self-fulfilling prophecy might be averted.

The Fed’s moves today were coordinated with the central banks of several overseas counterparts, implying that there may be a greater understanding of the global risks associated with a continued credit crisis here in the United States.    

Did the Fed hit the hyperdrive button fast enough to avert the pull of yesterday’s black hole?   I certainly hope so!