Financial planners applauded last week’s dramatic one-half-percentage-point cut in the federal funds rate by the Federal Reserve Board, saying the move provides an opportunity to calm nervous investors and help clear up their debt problems.
The move, which lowered the benchmark interest rate that banks can charge other banks for overnight loans to 4.75%, from 5.25%, is expected to ripple through the economy and lead to lower interest rates overall.
“If bank interest rates follow, this presents an opportunity to refinance interest-only mortgages and adjustable-rate mortgages,” said Thomas Orecchio, principal for Old Tappan, N.J.-based Greenbaum & Orecchio Inc., and chairman of the Arlington Heights, Ill.-based National Association of Personal Financial Advisors.
“We are over the moon that there has been a rate cut,” said Stacy Francis, owner and president of New York-based Francis Financial Inc. “We had clients who had gotten a little aggressive with ARMs, and now we are looking at switching them to 30-year or 15-year fixed-rate loans.”
Ms. Francis said she has also encouraged clients who have down payments ready but have been hesitant to buy real estate to start looking again as rates go down.
Planners were equally enthusiastic about the reassuring signals they felt the Fed conveyed.
Activist Fed
“The Fed sent a clear signal that it will be activist and won’t let things fall apart,” said David Yeske, San Francisco-based principal of Yeske Buie Inc., a financial planning firm with offices in San Francisco and Vienna, Va.
“If you have an appropriate investment philosophy, you don’t need to react to cyclical events, but [the rate cut] is affecting the story I’m telling clients. I think that risk in the market has been diminished, and one of the sources of volatility is diminishing,” he said. “As a result, it’s one more cause of reassurance and one more piece of conversation to tell clients to stay the course.”
Little Rock, Ark.-based planner Eric Hutchinson also called the rate a reassuring message from the Fed to investors, who had been inundated by bad news.
“It sends a very strong message that things are going to be OK and that life as we know it is not over,” said Mr. Hutchinson, who is president of Hutchinson Financial Inc. “It was an appropriate salve on an open wound.”
Other planners gave Federal Reserve Board Chairman Ben S. Bernanke high marks for his unexpectedly bold move.
“He demonstrated that the Fed will be proactive and not just incremental,” said Nicholas A. Nicolette, president of the Denver-based Financial Planning Association and principal of Sparta, N.J.-based Sterling Financial Group Inc.
'Very encouraging’
“I was impressed not so much by the amount of the cut but by the fact that we have someone at the controls who is not timid and is ready to go ahead and take action when it is needed,” said Ed Morrow, chairman and chief executive of the Middletown, Ohio-based International Association of Registered Financial Consultants Inc. “It’s very encouraging.”
Mark Johannassen, a McLean, Va.-based managing director of Harris SBSB of Chicago, said the rate cut has allowed his firm to continue re-balancing client portfolios, a process which was interrupted by the market’s volatility in August.
“The market had given us some nice returns up to August, and we were beginning to reallocate portfolios back to targets,” said Mr. Johannassen, who is president-elect of the FPA. “The rate cut brought returns back to just about where they were in July, and allowed us to continue the process.”
The rate cuts also highlighted differences in planning philosophies.
For example, Mr. Orecchio said, he will advise his clients to convert home equity lines of credit to fixed-rate loans as a result of lower rates. Mr. Yeske, however, said he will advise clients to keep paying interest-only loans, now that rates are lower, to take advantage of leverage.
And some planners said they are cautioning clients to be wary despite — or perhaps because of — the rate cuts.
“The risk is that we will go back to being off to the races, and clients may have to plan on higher inflation,” said Lew Altfest, president of New York-based L.J. Altfest & Co. Inc. “This is a good time to refinance, but ultimately, rates may go up.”
Charles Paikert can be reached at
[email protected].
