The morning after

That interest rate slashing party the Fed held the other day could leave housing markets with a big hangover.

The Fed's move to cut both the federal funds rate AND the discount rate by 50 basis points Tuesday sent stocks soaring, but is already having some undesired effects that some skeptics warned of. The dollar is hitting record lows against the euro, a problem that took off after Saudi Arabia said it might no longer peg its currency to the dollar (see Bloomberg News story).

That could fuel inflation and make investment in dollar-backed assets like Treasurys and mortgage-backed securities less attractive to foreign investors, pushing up long-term interest rates. In other words, homebuyers could end up paying higher interest rates even as the Fed continues to cut short-term rates.

Foreign investors may also have less cash to invest, because a weakened dollar is curbing America's appetite for imports, and making U.S. exports a better deal. Calculated Risk explains how the "virtuous cycle" of the housing boom -- higher housing prices, more consumption and lower interest rates -- could be giving way to a viscous circle of lower housing prices, less consumption and higher interest rates.

At a press conference today, President Bush said he sees the boost in exports (much of which can be chalked up to past weakness in the dollar) as a positive.

"I say that the fundamentals of our nation's economy are strong," he said. "Inflation is down. Job markets are steady and strong. After all, the national unemployment rate is 4.6 percent. Corporate profits appear to be strong. Exports are up."

Asked if there's a risk of recession, Bush joked, "You know, you need to talk to economists.  I think I got a B in Econ 101. "

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