Beacon Trust Company - Monthly Commentary

FEBRUARY 4, 2008

FEBRUARY 2008 COMMENTS - INTEREST RATE CUTS & FISCAL STIMULUS. IS IT ENOUGH?

Fiscal stimulus and interest rate cuts are being thrown at our weakening economy. The current $150 billion proposed fiscal stimulus package and the 1.25% cut in the Federal Funds rate have come with unprecedented swiftness.

Economists often look at how a fiscal stimulus package will move through the economy offsetting economic weakness. The government's effort to stimulate the economy depends on the average consumer's propensity to spend as much of the $150 billion proposed tax rebate as possible. The more spent, the greater the multiplier and the larger the impact on economic growth.

Recent experience with tax rebates has a mixed review. In 2001, estimates show that only 40% of that year's tax rebate was spent by consumers. In 2003, 90% of that year's tax rebate was spent. Generally speaking, tax rebates targeted at lower-income earners tend to be spent more quickly than with upper-income earners. This would explain Congress' targeting a rebate aimed at lower income workers with an income phase-out. Assuming quick passage, we should begin to see the economic impact of the stimulus package sometime in the 3rd and 4th quarters of this year. With a $150 billion tax rebate proposed, one must consider the paper losses in housing and other assets as diluting the tax rebate's effectiveness. Similarly in 2001-2002, the stock market experienced a huge asset downsizing. The economy during that period was able to right itself soon thereafter with the help of the Fed and tax cuts.

FEDERAL RESERVE ASLEEP AT THE SWITCH?

The other wild card has been the Federal Reserve. On January 22ND, the Fed cut rates 75 basis points intra-meeting to calm market jitters. Nine days later the Fed cut another 50 basis points. Apparently, the governors are coming to the realization that maybe inflation is not the issue and that they are behind the market in terms of where Federal Funds should be, given current economic conditions. Monetary easing is expected to continue as the Fed plays catch-up. With the two-year note at 2.0% and Fed Funds at 3.0%, the market is telling the Fed to ease more. This will likely occur at the next scheduled meeting of the Federal Reserve.

ARE INTEREST RATE REDUCTIONS AND FISCAL STIMULUS THE ANSWER?

We believe the answer to this is yes, tempered by the fact that both take time to work their magic through the system. The Fed is behind the curve and will act to cut rates further. This, combined with fiscal stimulus will help deflect the downturn although there are still asset deflation issues that will work to retard growth. Inflation is not the issue currently. The government is at work to ease stress in the system and this coupled with a lower dollar and the related increase in exports will minimize the downturn. We expect to see more positive growth in 2009 with the equity markets reaching an inflection point sometime around mid-year to the third quarter of 2008.

THIS MONTH'S FOCUS - THE FEDERAL RESERVE'S EASING MOVES IN PERSPECTIVE

The magnitude and rapidity over a short period of time of the Federal Reserve's recent easing moves in response to global financial difficulties cannot be over-emphasized, as indicated in the chart below. The Fed Funds rate is now 3% and the Fed's next regularly scheduled rate meeting is March 18th.

MAJOR DOWNWARD MOVES IN THE FED FUNDS RATE

2/14/86 - 1/30/08

One may well ask, "How has the combination of the Fed's most recent 125 basis point cuts in the Fed Funds rate and the $150 billion stimulus package affected key economic indicators?" The policies have clearly helped stabilize equities. On the other hand, indicators of inflation generally worsened slightly.

Please feel free to contact us with any questions you may have on this or any other topic.

VISIT OUR OFFICES AT 333 MAIN STREET, MADISON,NJ OR VIEW US AT http://www.beacontrust.com