Five Reasons Why the Fed Will Cut Rates

Five Reasons Why the Fed Will Cut Rates

from 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 scenario
imagining 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 Rates
David Gaffen
WSJ, September 4, 2007, 3:14 pm
http://blogs.wsj.com/marketbeat/2007/09/04/five-reasons-why-the-fed-will-cut-rates/

4:53 PM (6 hours ago)
Five Reasons: Why the Fed Will Cut Rates

from WSJ.com: MarketBeat Blog - WSJ.com by David Gaffen
A couple of weeks back MarketBeat took a look at a number of factors
influencing the Federal Reserve’s thinking that might weigh in favor of
the slide-rule committee keeping the federal-funds target rate on hold.
This edition comes a bit later than expected, but it seems a good idea
to take a quick gander at a number of reasons why the Fed may indeed reduce the target to 5% from 5.25% at the Sept. 18 meeting.

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%). Today’s data from the Institute for Supply Management shows its
   prices paid index fell to 63 from 65, which suggests ongoing price
   inflation for producers, but at a slower rate.
   
2. Market conditions are still problematic. The
   asset-backed commercial paper market remains knotted and credit spreads
   in high-yield markets have widened out, suggesting difficulty in
   borrowing and lending. That isn’t to say the Federal Reserve needs to
   placate high-yield borrowers, but a lack of ability to get capital
   hurts the real-world economy.
   
   
   September futures are at an implied yield of 4.95%, fully pricing in a rate cut. (Source: CME Group)
   
   
3. The market is expecting it. Federal-funds
   futures contracts traded on CME Group are still pricing in a 100%
   guarantee that the Fed will cut rates on Sept. 18. 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. According to Bianco Research, in 29 of the last 30 Fed meetings,
   by this time (10 trading days before the meeting), the futures
   contracts were accurately forecasting what the Fed planned on doing.
   
4. The housing market’s troubles warrant it. At the Fed’s confab in Jackson Hole, Wyo., Fed governor Frederic Mishkin presented a scenario
   imagining 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, one that currently doesn’t seem all that
   far-fetched.
   
5. They have little to lose.
   There’s consistent and steady talk of the “moral hazard,” whereupon the
   Fed steps in and rescues speculators through lower borrowing rates —
   which is how some view the frequent rate cuts a few years back, when
   the Greenspan-led Fed lowered the target to 1%. “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.’”