Five Reasons Why the Fed Won’t Cut Rates
The Fed assumption made by many is that its a sure thing that Bernanke and the FOMC are going to give into the whining and pleading and crying and begging and beseeching and howling and weeping (In Yiddish, its called "kvetching") from the anti-free market cry-baby commies currently residing in positions of influence on Wall Street and the media.
Therefore, goes this line of thinking, we should expect rates cuts in September and beyond.
Not so fast, says the WSJ's Marketbeat. They assembled a short list of 5 reasons as to why a rate cut won't happen -- least not at the September meeting:
Why the Fed Won’t Cut Rates
1. Official on-the-record Fed commentary: St. Louis Fed head William Poole and Richmond Fed head Jeffrey Lacker have loudly argued against it. with Poole saying a “calamity” is required first, and Lacker noting the impact on consumers is “relatively small."
2. Off-the-record whisperings: Fed reporter Greg Ip wrote: while “officials acknowledge conditions are far from calm,” they cited stable stock prices, “a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.”
That doesn’t sound like a monetary policy committee that’s ready to lower rates.
3. What’s Been Done So Far: Through open market operations, the Fed has maintained a lower funds rate than the 5.25% target for the last couple of weeks. In addition, the Fed reduced the fee on lending from the System Open Market Account
4. Key economic indicators: Official household unemployment rate in July was 4.6%, which was up from the yearly low of 4.5%. Generally, it takes at least a change of 0.2 percentage points in this rate for the Fed to act, notes Ashraf Laidi, head of forex strategy at CMC Markets. Meanwhile, the year-over-year rate of consumer inflation still remains above the Fed’s upper target of 2%.
5. Moral hazard: Comments by Messrs. Poole and Lacker and the Fed suggest they are reluctant to be seen as bailing out hedge funds and other Wall Street players who became too intimate with leverage.
Go read the entire thing.
(Coming later this week: 5 reasons why they will cut rates).
>
Source:
Five Reasons: Why the Fed Won’t Cut Rates
David Gaffen
Marketbeat, August 22, 2007, 12:02 pm
http://blogs.wsj.com/marketbeat/2007/08/22/five-reasons-why-the-fed-wont-cut-rates/
Wednesday, August 22, 2007 | 03:37 PM | Permalink
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Comments
Any one of these headlines would send a "normal" market running for the exits:
http://www.bloomberg.com/
When you can hand over the title of someone else's boat as collateral to the fed. for cash...none of those reasons for or against matters one damn bit.
Ciao
MS
Posted by: michael schumacher | Aug 22, 2007 3:52:03 PM
You mean they would risk another tantrum from Cramer?
Posted by: GerryL | Aug 22, 2007 4:03:02 PM
You mean they would risk another tantrum from Cramer?
That would be a moral hazard, esp. for impressionable young children.
Posted by: Douglas Watts | Aug 22, 2007 4:07:35 PM
Barry you see the other blog on there under real time economics where they grouped types of views on the fed into 4 categories. One of the comments calls you out specifically into your own 5th category. What say you?
Posted by: Owner Earnings | Aug 22, 2007 4:13:42 PM
MS,
when you said
"When you can hand over the title of someone else's boat as collateral to the fed. for cash..."
I have this burning image of the Skipper and Gilligan handing over the SS Minnow to the FED.(LOL)
As for the Bloomberg headlines...OUCH!!!!!
Here No Evil, See No Evil, Speak No Evil.
An odd question would be(In The New Economy)
Is "Foreclosure"
the new code word for "Merger" and/or
"Takeover"????
Posted by: MarkTX | Aug 22, 2007 4:15:56 PM
If they cut, run for the exits IMO!
Posted by: Peter | Aug 22, 2007 4:16:14 PM
#5 doesn't fly. Since when does the Fed care about moral hazards?
Posted by: patient renter | Aug 22, 2007 4:25:03 PM
Perhpas they cut, perhaps they won't. Doesn't really matter. Below from another blog. Sure as hell hope this is incorrect otherwise it's going to get "fugly". Not cutting,..... not likely.
"Coventree noted they were not able to place any of the $268 million in A paper that matured on Aug. 16.
The problem goes far beyond small players like Coventree. About $550 billion in short-term ABCP is rolling over in the next couple of weeks, and the bond traders say there is no bid for any of it."
Posted by: Stuart | Aug 22, 2007 4:31:12 PM
One commentator today spoke of a 70's style correction and I thought:
Just think how much richer we'll feel if we can buy stocks for only half what they cost today!
Posted by: Bob A | Aug 22, 2007 4:32:48 PM
It sure looks like it is being priced into the market.....
But I can't imagine it happening that soon. The broader economy does not support a cut.
Posted by: TP | Aug 22, 2007 4:33:28 PM
sorry for repeating myself again and again.
but this is my take home message:
nobody in the world wants USA economy to tank, if necessary they will lend upto 2 trillion dollars (Europeans, chinese, brazil, india etc..) for this party to go on.
so why do we still whine when that happens....yes its not a fair game....the bulls have it on a platter....but the bears will have to claw it using real unbearable market/economic conditions...but thats how it is.
i would never bet my money on the short side....knowing how everyone wants the bulls to win at any cost...
Posted by: techy2468 | Aug 22, 2007 4:35:25 PM
The big question one has to ask is why are the main banks hoarding all the dough. I would like to know what chain reactions are set in motion. Whomever sent T-bills prices to the moon knows what they are or thinks they do. The fed is going to cut, but will it matter. Doubt it.
Posted by: Stuart | Aug 22, 2007 4:57:45 PM
A cut will not restore confidence in toxic "assets", which is the manifestation of the crisis today.
However, when it is clear to even the Fed that the loss of the housing related input for the economy is a calamity, it will be cut.
The only question is if it will be this week or by the end of the year.
Posted by: Neal | Aug 22, 2007 5:37:08 PM
It seems to me that while an inter-meeting cut is unlikely, a cut is coming soon nonetheless. There are too many powers that be calling for one and it's mostly symbolic if the effective rate has been manipulated below the official target lately anyway.
One important variable is what other central banks are doing? If they all cut, then they maintain their rate differentials and currency values might remain relatively stable altho I would expect the commodity based ones like CDN and AUD to gain over time. In other words they can collude to do whatever they want with rates without much immediate negative impact.
==whipsaw==
Posted by: whipsaw | Aug 22, 2007 5:57:12 PM
Why the Fed Will Cut Rates
"1. Official on-the-record Fed commentary: St. Louis Fed head William Poole and Richmond Fed head Jeffrey Lacker have loudly argued against it."
Jeffrey Lacker is not a voting Fed member this year and nobody cares about his opinion. William Poole was not invited to the discount rates cut meeting because of his "calamity" comments; suggesting Bernanke and other Fed member wanted to distance themselves from the Poole and his "calamity" comments
"2. Off-the-record whisperings..."
Simply because the conditions have improved somewhat does not mean the problems have been solved. The Fed needs to cut rates to make sure the improvements are permanent
"3. What’s Been Done So Far: Through open market operations, the Fed has maintained a lower funds rate than the 5.25% target for the last couple of weeks."
It shows that the Fed realizes that the lower rates are needed - supporting the Fed is preparing for a cut.
"4. Key economic indicators: Official household unemployment rate in July was 4.6%, which was up from the yearly low of 4.5%."
This is the past. Today mortgage job cuts surpass 38,000 and there will be more job cuts in the near future
"5. Moral hazard: Comments by Messrs. Poole and Lacker and the Fed suggest they are reluctant to be seen as bailing out hedge funds"
Oh please, what hedge funds?
It has nothing to do with the hedge funds.
It is about bailing out the economy. (What the bears are now saying that the economy is strong and does not need any stimulation by the Fed?)
!!! Bonus (via Bloomberg TV):
Even though Greenspan has denied it today; nevertheless, a number of people who were present at Deutsche Bank dinner last night confirm that Greenspan said that he would already cut rates if he were Bernanke.
Posted by: Some Days We Eat the Bear | Aug 22, 2007 6:00:08 PM
Hear! Hear!
Though perhaps the more important one that has gone missed:
If economic activity elsewhere in the world has increased the global marginal product of capital, then both the slower growth here and the higher global interest rates are entirely rational.
Specifically, with improving global economies, more capital is flowing to other parts of the world. Slowing capital imports slow productivity and wage growth and settles the US economy into a lower growth rate.
Nothing in that statement implies that the interest rate is wrong or that there is something fundamentally illogical about the slowdown. But people who don't understand that capital markets reflect the global productivity of *real physical capital* are going to assume that a slowdown implies the need to cut rates.
Inflation is the key indicator because it tells us when slowdows are rational (inflation remains at the high end of comfort zones) or irrational (inflation falls to the low end or below the range).
So long as we're at the high end of the comfort zone, a cut will only generate inflation (and bigger problems in the next cycle). Any policy that doesn't recognize this fundamental truth is just "special interests" advocating their own best interests.
Posted by: Clayton | Aug 22, 2007 6:23:38 PM
1. Official on-the-record Fed commentary
It's not a problem.
It's contained to subprimes.
It's contained.
Surely you jest, yes?
I do not jest. And don't call me Shirley.
Posted by: KnotRP | Aug 22, 2007 6:25:43 PM
And the number one reason the Fed will not cut rates:
French maid costumes with crotchless panties don't come in Ben's size.
Posted by: Rob Dawg | Aug 22, 2007 6:33:16 PM
Back after a long absence. What did I miss?
My take: Bernanke is an academic wonk. Academics with backbone trust their models. There are no "gut" decisions. Bernanke acted last week in the face of a credit market seizure -- not because equity markets dropped.
It appears that the credit markets are moving again -- in this case, models projecting risks of inflation continue to be top priority for an academic.
I expect the Fed to hold rates steady at the next meeting and indicate a neutral bias not by dropping the worry over inflation, but by raising the worry over smoothly functioning credit markets.
In effect, the Fed will equity markets to go do what they please -- he is not cutting rates unless another seizure in credit occurs or his models for future inflation show drops.
Posted by: Mr. Beach | Aug 22, 2007 6:43:02 PM
I have a question about all this rate cut business. If cutting rates will 1)lift the stock market, 2)rescue the hapless fools that bought way too much house and cant pay, 3)make worthless CDO's and other paper golden again, you get the idea. If all that is true, why not just cut rates to 0% and have a super stoked economy on steroids? No points for the old "inflation would rage uncontrolled" line, we have seen that asset gains can offset inflation in the things that dont go up in price that the FED tracks. have at it!
Posted by: Jerry | Aug 22, 2007 6:44:03 PM
It's so sad looking at that unemployment rate figure and then looking at the state I live in (Michigan) :(
Posted by: Tom | Aug 22, 2007 6:54:24 PM
is anyone watching the financials and XLF since the close of trading today? they're screaming
Posted by: scorpio | Aug 22, 2007 7:08:30 PM
BAC injecting $2 B into CFC, takes back 7.5% preferred convertible at $18/sh. yowza
Posted by: scorpio | Aug 22, 2007 7:12:47 PM
Damn. Shorts appear to be set up for another massacre at the open. I put some on today so I'm not taunting. I don't really buy the anti free market if the fed cuts rates arguement though. They raise rates when things get too hot, they lower when there's trouble. You can argue not having a central bank engaging in monetary policy but that's not where we're at. On another note, BAC buying convertible pfd doesn't resolve this debt cap mkt issue by itself imho.
Posted by: sasso | Aug 22, 2007 7:35:28 PM
Barry, when will you do the 5 Reasons It Doesn't Matter?
Posted by: SPECTRE of Deflation | Aug 22, 2007 8:34:29 PM
