Update for investors - Since the onset of the global credit crunch in August 2007, the US Federal Reserve has resorted to a slew of innovative and sometimes unconventional approaches to dealing with the problems faced by distressed financial institutions.

The effort has been part of the Fed’s attempt to stave off a full-fledged financial sector meltdown and to blunt the adverse impact of the ongoing disruptions on US economic activity.  Despite the massive amounts of liquidity injected into the money market, it doesn’t appear that the measures introduced will pose any significant inflationaary risks to the US economy.

Analysts don’t believe that the Fed’s ability to provide futher liquidity injections into the financial system is compromised by its current level of commitment.  Should the Fed’s cupboard become bare, there are several options that it can pursue to address any shortcoming it may face.

Ensuring stability in the financial markets has enormous implications for the economic wellbeing and prosperity for any society such that it becomes imperative for it be be pursued at reasonable costs.

For the second time in a row, the Bank of Canada has cut the overnight rate by 50bps, bringing the target rate to 3.00%.  This is now the first time since 2001 - when Canada was last concerned about the fallout from a U. S. recession - that the Bank has seen fit to cut rates by a full percentage point in just six weeks time.

While the latest statistics have underscored a resurgent strength in Canadian home construction, manufacturing and international trade, the Bank is looking past these red herrings and has their sights set squarely on the formidable risks looming over the horizon.

The Bank noted that buoyant growth in domestic demand has been substantially offset by the fall in net exports.  Due to a ‘deeper and more protracted slowdown in the U.S. economy’, this drag from trade is expected to remain.  Low levels of unemployment and aggressive easing from the Bank to date highlights why many Canadians have remained fairly sheltered from  the U. S. and financial centered woes.

When the updated Monetary Policy Report is reported, it is expected to report dramatically lower expectations for the U.S. and global growth compared with January forecasts.   The Bank hopes to ease these pressures.  Lower rates will help shield the economy from externally-driven weaknesses, but the imbalances in the financial sector continue to impair short term borrowing.

The Banks forecast for Canadian economic growth in 2008 and 2009 still seems optimistic which is a good sign overall.

As reported in the Globe and Mail this afternoon, the U.S. Federal Reserve Board slashed interest rates by three-quarters of a percentage point Tuesday and left the door open to more cuts, moving aggressively to stem a financial market meltdown and avert an economic recession.

Under the watch of Chairman Ben Bernanke, the Federal Open Market Committee voted at its scheduled meeting to bring the benchmark U.S. federal funds lending rate down to 2.25 per cent. The Fed’s decision was not unanimous, with two of 10 policy makers dissenting in favour of “less aggressive action.”

In the statement accompanying the decision, the Fed said that the outlook for economic activity has weakened further, consumer spending has slowed and labour markets have softened. “Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”

The central bank also noted that although it expects inflation to moderate in the coming quarters, uncertainty over the outlook for inflation has increased.

“Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the Fed said. “However, downside risks to growth remain.”

Charmaine Buskas, a senior economic strategist with TD Securities, said the tone of the Fed’s statement points to further rate cuts, with the central bank noting that it will “act in a timely manner as needed to promote sustainable economic growth” and price stability.

“Given that credit markets remain in a fundamental paralysis, and the economy continues to unwind, we are of the view that the Fed will remain in an easing cycle for the next few meetings,” Ms. Buskas said. “The key issue is to first unclog the credit markets and get the wheels turning again.”

Ian Shepherdson, the chief U.S. economist at High Frequency Economics, said that by April 30 Mr. Bernanke should be able to extract another 50-basis-point cut from his more reluctant colleagues. “This will all make no difference to the near-term data, but it is a necessary precondition for recovery, eventually.”

Tuesday’s cut is the sixth time in as many months that the U.S. central bank has lowered the federal funds rate, which is now at its lowest level since December, 2004. The rate was 5.25 per cent in August, when the troubles with U.S. subprime loans first escalated and began spreading to capital markets and the wider economy.

Although Tuesday’s 75-basis point reduction is large by historical standards, it is bound to disappoint some investors. The Fed also eased rates by 75 basis points at an inter-meeting move two months ago.

Fed-funds futures had priced in a full percentage-point cut after this weekend’s stunning near-collapse of investment bank Bear Stearns Cos. Inc. sent shockwaves through markets.

Stock markets in both Canada and the U.S. pared gains immediately after the Fed announcement, although both recovered in the final hour of Tuesday’s trading session.

Global credit jitters escalated this past weekend when JPMorgan Chase & Co. agreed to step in to buy Bear Stearns for just $2 (U.S.) a share after the Fed said it would backstop the deal. The central bank announced that it would provide funds to any other troubled investment dealers for the first time since the Great Depression, moving away from its traditional policy of only lending to large commercial banks.

Over the weekend, the Fed also made an emergency quarter-point cut to its discount rate to 3.25 per cent.

Mr. Bernanke has been pulling out all of the stops, taking new and extreme steps in his efforts to ease the credit crunch, set financial institutions on a more stable footing and calm financial and stock markets. Fears that the Bear Stearns situation could trigger similar meltdowns at other financial companies sent Canada’s equity market into a tailspin on Monday.

Bank of Canada Governor Mark Carney has said that while he is monitoring the situation, Canada’s monetary policy will be driven by domestic conditions, not by panic in global financial markets or external credit problems.

The central bank lowered Canada’s rates by a half-point to 3.5 per cent on March 4, citing a weaker-than-expected U.S. economy. According to a spokesman, the last time in modern history that the Bank of Canada slashed rates by 75 basis points was on Oct. 23, 2001.

Warmly,

Mary Wozny

With the record high divorce rates in Canada and the United States, one should ask themselves how will a divorce impact my credit report?

A divorce decree alone will have no impact on jointly held accounts that are a part of your credit report. For joint accounts, including credit cards, car loans, home mortgages and lines of credit, you and your ex-spouse continue to have joint liability. You are both responsible, and if one of you defaults, creditors will seek payment from the other.

Just because your divorce may be finalized and you think that “finally it’s all over!” the reality is that if you were a co-signer on anything with your previous spouse then you are still liable for these debts.  Failure on the part of either party to make payments on time and/or pay off these debts will result in your own personal credit being potentially ruined!    Often this happens and you are not even aware of it!

Check your own personal credit and FICO/Beacon Score to avoid these surprises before it’s too late.

In Canada, you may check your credit online using the link to Trans Union at www.MaryWozny.com.

Warmly,

Mary Wozny