U.S. Senate Sends Expanded Mortgage Markets Rescue Plan Back to the House for a Vote

The Senate also added in a number of vital tax extenders, including extensions of the AMT patch and the R&D tax credit. They also added provisions for clean energy tax breaks.

The bill moves over to the House of Representatives for another controversial vote within the next day.

Pressure to pass the bill in House has mounted in the past two days as financial markets continued to demonstrate extreme stress—at least partly in response to the House defeat of an earlier version of the bill on Monday—while recent signals from the economy have been extremely weak. September auto sales plummeted to recessionary levels, while the leading ISM manufacturing indicator also saw a sharp drop indicative of recession.

While the vote in the House will be a nail-biter, we expect that it will pass with the Senate amendments and additions.

The evidence that the economy is in recession is plain to see, with real consumer spending expected to decline by close to 2.5% in the third quarter. The Federal Reserve needs to respond promptly. We expect that the Federal Open Market Committee will move before the end of October to reduce interest rates by 50 basis points, with the federal funds rate lowered to 1.50%.

In order to secure the cyclical recovery in 2009, we also expect the Fed to take further action to lower rates by a further 25 basis points at the end of 2008 and another 25 basis points early in 2009, ultimately lowering the funds rate to 1.00% by February 2009.

Reductions in the funds rate will be immediately reflected in lower prime lending rates, and the prime rate, which is becoming a more important benchmark in view of the extreme turmoil in LIBOR interbank borrowing markets. Yes, lower interest rates will provide support to the economy now in the form of lower prime lending rates for both consumers and businesses. In addition, lower short-term funding costs will boost operating earnings in the banking system and lead to a faster recovery of severely depleted banking system capital—the reconstitution of which is vital to restore normal credit conditions in the economy.