Skip to comments.Fed rate cut? Don't bank on it
Posted on 08/22/2007 10:42:10 AM PDT by Hydroshock
NEW YORK (CNNMoney.com) -- Investors who are counting on the Federal Reserve to cut interest rates sometime in the next month or so may end up badly disappointed.
The credit crunch of the last month has convinced many on Wall Street that a cut in the central bank's key short-term interest rate is basically a lock.
Stocks jumped Friday after the Fed announced a surprise cut in the little used discount rate that the central bank charges on loans made directly to banks - and again on Tuesday on bets the Fed will cut its other key rate, the fed funds rate, by the central bank's next meeting on Sept. 18, if not beforehand. The fed funds rate is the more important rate since it affects many consumer loans.
But a number of economists said investors and the Fed need to keep an eye on several key economic readings due between now and then. Many of these experts believe there is still a good chance the Fed will again hold steady next month, leaving the fed funds rate at 5.25 percent, where its been since June 2006.
"The Fed would like to do everything possible under the sun but make a cut in the fed funds rate," said Bernard Baumohl, an economist and author of the textbook "The secrets of economic indicators."
(Excerpt) Read more at money.cnn.com ...
Not for you and me, my friend. For Goldman, Merrill, Citi et al, they’ve not only rec’d a 1/2 point cut at the discount window, but a 1/2 point reduction in the fees they pay the Fed to borrow against pledged securities, plus an extension from “overnight” to “thirty days”... pledging the very securities that are underlying this whole stenchy situation. While the Fed has “broad discretion” as to what they will accept as security, I’ve seen no class of securities valued at less than 85% of face.
Cutting the fed funds rate will cause the market to rise, but also possibly inflation. Inflation is toughest on people who rely on the bank accounts for most of their savings... so mostly poor and elderly.
All the fund managers can show how great of a return they’ve had, but the real return won’t be that much.
While the Housing Bubble implodes all across the U.S.
Just like Alfred E. Neuman. LOL ! LOL !
The Fed has had this fixation with inflation going back now 30 years to Carter's days of stagflation. The Fed served us up some bitter medicine in the early 1980s and the Reagan revolution paid the price for that in the '82 elections, but it cured the damage done by Carter. But they should have a wider view than just keeping the brakes on inflation. That's important, to be sure, but so is the stability and viability of the overall system. To the extent that the Fed has influence over that, they should use it when tremulous times come.
It's not the Fed's job to bail out banks for lending money out without adequately investigating the borrowers ability to repay. It's not the Fed's job to pay attention to the equity markets. If there is a massive economic slowdown, yes, cut the rate, but it's not needed for this. The market ultimately punishes stupidity.
Inflation is a big issue if you have a fixed income. The Fed will cut rates when they see evidence of an economic slowdown, which is not yet. I suggest waiting untill after all of the high flying money managers get wind of what their third quarter bonuses look like. I doubt many of these people will be making large cash purchases with their bonuses.
Doesn’t it deserve to implode? You must be a developer!
Cutting the FF rate would, in effect, support the high cost of housing which is inflationary. Cutting the rate would be a stupid, political move and I’m hoping that the Fed doesn’t go there.
Neither Goldman nor Merril (nor Bear Stearns nor Morgan Stanley nor Lehman) are allowed to borrow at the discount window. What’s more, the discount window is 50bp above the fed funds rate. That is, it’s a penalty rate still, just less so.
A voice of sanity. Funny, everyone is convinced that the Fed will cut rates but I haven't heard anything from the Fed itself except that inflation is still a concern.
And, contrary to what is being claimed by some people here, inflation is very bad for owners of financial assets. The fact that the Fed is willing to fight it is good for stocks and bonds - in the long run.
The FED increase the FF rate on 05/10/06 to 5.25% with Risk Assessment of “Inflation Risk” versus a Risk Assessment of “Balanced” when they increased it to 5.00% on 05/10/06. Since that time, no change but each time the Risk Assessment is noted as “Inflation Risk” (8 meetings).
So, why would the FED decrease the FF rate now? Inflation has not disappears - the housing market is inflated, big time - food costs are increasing along with tons of other items. No, the FED must not move the FF rate up or down at this time. If it does, it’s politics and the FED does not play politics, I hope.
Correction to above - increase to 5.25% was on 06/29/06 with not change since that date.
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