Five Reasons Why the Fed Will Cut Ratesfrom
The Big Picture by ritholtz
Late August, we reviewed Marketbeat's
Five Reasons Why the Fed Won’t Cut Rates.
At the time, we noted they would present the opposing arguments.
Today is that day: Here are Five Reasons Why the Fed Will Cut Rates
<blockquote>
1. Inflation isn’t out of control. The
core personal consumption expenditures price deflator rose at a 1.9%
annual rate in August, inside the Fed’s assumed preferred range for the
rate of inflation(1%
to 2%);
2. Market conditions are still problematic. The
asset-backed commercial paper market remains knotted and credit spreads
in high-yield markets have widened out;
3. The market is expecting it. While the Fed isn’t
one to necessarily respond to bile-spewing yahoos on television
demanding rate cuts, it isn’t in the habit of ignornig the market as a
practice.
4.
The housing market’s troubles warrant it. In Jackson Hole, Fed governor Frederic Mishkin
presented a scenarioimagining a 20% decline in real house prices, and suggested that
faster, sharper cuts in the Fed’s targeted rate would minimize the
impact of such a downturn.
5. They have little to lose. “Two or even three sequential ¼ point cuts
will not create a re-kindled gambling spirit,”writes David Kotok, chief investment officer at Cumberland Advisors in
Vineland, N.J. “Thus the Fed can cut without violating its proper
concern about ‘moral hazard.’” </blockquote>My view of this?
Numbers one and two are quite valid; number three -- the market
wants/expects it -- is irrelevant. Number 4 raises a problem that rate
cuts won't really help -- the housing market is in trouble. Number 5 is
pure unadulterated bullshit fiction.
Go read the
full post.
>Source:Five Reasons: Why the Fed Will Cut RatesDavid Gaffen
WSJ, September 4, 2007, 3:14 pm
http://blogs.wsj.com/marketbeat/2007/09/04/five-reasons-why-the-fed-will-cut-rates/