Wikinvest Wire

This week's rate cut

Monday, October 29, 2007

Financial markets are expecting a rate cut this week and the Federal Reserve is likely to give them one. For the Fed not to do so would probably result in the kind of added turmoil that they are specifically trying to avoid and, if the September half-point cut is any indication, Ben Bernanke will be accommodating rather than provocative.

Fed funds futures contracts indicate that a quarter-point cut is the most likely outcome for this week's meeting, ominously scheduled for Halloween. The phrase "a trick-or-treat from the Fed" is already being heard and will surely continue to be uttered until 11:15 AM PST on Wednesday morning when the policy action is announced.

Chart courtesy of the Federal Reserve Bank of Cleveland

By January of 2008, short-term rates are expected to be at about 4.25 percent, implying another quarter-point cut at the December FOMC meeting.

I continue to believe that the Bernanke Fed set a dangerous precedent when they made the surprise half-point cut in September. Last week's stock market action had the feel of equity investors expecting the Fed to move this week when economic indicators - jobs, growth, and inflation - really don't indicate that one is necessary. One could argue that higher commodity prices imply that, if any move were being contemplated, it would be a rate increase aimed at heading off higher inflation.

Keep in mind that while housing is clearly suffering, and perhaps set to pick up steam with the wave of foreclosures now coming onto the resale market, broad equity markets are still up for the year - the Dow has gained 10.8 percent, the Nasdaq has risen 16.1 percent, and the S&P500 is up 8.2 percent.

Additional rate cuts are increasingly being viewed as either bold preemptive moves to mitigate the effects of the credit market turmoil on the broader economy or acceding to the wishes of Wall Street firms that will always opt for lower interest rates if given the choice.

Sometimes it's hard to tell the difference between the former and the latter.

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This post is an excerpt from the most recent Weekend Update at
Iacono Research. The outlook for short-term interest rates is just one of many topics that are covered each and every week, along with commodities, related equities, and foreign currencies.

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matt said...

Maybe it will be both trick and treat. The Street is expecting a 25 bp cut. Maybe the Fed will give them 50 again.

Tim said...

I think he's going to wait until it's closer to Christmas to do the half point cut.

Anonymous said...

Greater than a 25 cut, means they believe in an imminent dark matter event. Gold and foreign currencies seem to be pricing a bigger than 25 cut.

Anonymous said...

please anyone reading this post, take 10 minutes of your time and go to read it. if we have any hope whatsoever of getting out of a world-wide depression of biblical proportion, signing this petition is worth 10 minutes of your time.

and pass it on to your friends that are scared of what they are seeing as well. if enough people sign this we might have a chance.

just a small flicker of hope in an emmense black void.


Anonymous said...

I'm thinkin a 25 bp cut.
Although if Bernanke wanted to have some fun, he'd not cut, then cut by 75bp next time. Think of what those two actions would do to the markets! Maybe knock out several hedge funds.

Y said...

most likely a 25 bps cut & the market will trade flat, or even lower as people take profits. the 25 bps cut is already priced in. although i would love to see another 50 bps cut, or be surprised by a 75 or 100.

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