Fed MUST Cut Interest Rates
By Markos N. Kaminis - Economy and Markets
Even as the Fed discussed its most recent efforts to aid the economy, the markets moved lower as confidence is absent. As a result, the US Federal Reserve will likely be forced into cutting the target rate sharply in desperate attempt to stop economic and financial market collapse, even though the financial markets are supposedly not its responsibility.
(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)
The Australian Central Bank gave the U.S. Fed a clue today, when it cut its key rate by a dramatic 100 basis points, to 6.0%. The brave Aussies were not accompanied by Japanese action. The Bank of Japan I'm sure believes kept its head by not doing so. Japanese GDP fell dramatically below water in Q2, but the Japanese are still gun shy after the economic extremes they've experienced over my lifetime. The ECB also stayed patient a few weeks ago, and the Bank of England is scheduled to meet on Thursday.
Today, Fed Chairman Bernanke addressed the nation, we suspect in a first attempt to quell the sense of panic that has overwhelmed our nation. Benjamin even went so far as to state that in light of reduced inflation concerns and heightened risk to economic growth, the central bank would rethink policy. This was a clear implication of future expansionary action. In plain English for Main Street, he basically said he might cut interest rates soon. Today's FOMC Meeting Minutes for September, released this afternoon, showed that some of the Committee members were favoring a rate cut.
I don't think just saying so is going to be enough though. Congress has already done a great job of perpetuating fear. What Ben does not get right now is that the selling that is occurring on the Street currently is direct result of Congress and the Administration screwing up over the last couple weeks. It is perhaps, an unstoppable force. Congress' mislabeling of the Emergency Economic Stabilization Act as a "Wall Street Bailout," which led to public outcry against it, forced the bill to fail. Upon its failure, all confidence was lost within the investment community. This forced the Administration to tell the truth, that our economy stood on the brink of abyss, and often loose lipped Congressmen chimed in with their take on how bad things were. At that point, they had to or else the bill would fail again. But, in doing so, they perpetuated fear and screwed up a great opportunity first presented by Paulson. Good luck containing fear now!
The Fed will likely be forced by ongoing market and economic pressure, and global chaos, to cut interest rates in tandem with the ECB, and probably the Bank of Japan as well. So, current patience will likely transform into panic stricken central bank action in short time. Treasury markets and effective rates concur, so mark my words, a cut should be coming.
My call, expressed first this past Sunday/Monday in our "Week Ahead" piece, was echoed today by PIMCO's Bill Gross. Bill today stated that he preferred a 100 basis point action. I just can't see this stubborn, inflation fearful Fed, acting so aggressively. Also, in doing so, it would use too many bullets all at once, and leave less to work with later on. I'm looking for 50 basis points, and I would rather see it done now while bankers still have some semblance of order, versus down the road when they're running around like headless chickens.
Please see our disclosures at the Wall Street Greek website and author bio pages found there.
posted by The Greek | 2:12 PM
2 Comments:
No chance in hell, BOJ gets involved in this rate cutting non-sense. Most likely would be Fed, ECB, BOC, SNB, RBNZ.
The y2k/contagion liquidity injection led to the net/housing/oil bubbles, so the question is what the current liquidity injections will do. Furthermore, China was 40% of the problem in oil prices. Their mad rush for the 3Gorges & Olympics standing on a dollar peg. This is why I argued it is fine to have a dollar peg, but as China is much bigger than Panama, the Fed would have to include China in the policy envelope. The peg created an endless vicious feedback loop which made things much worse, in addition to sovereign wealth funds pumping up oil prices to meet Osama's $144 target. I also said the Fed had to raise rates to like eight or ten percent, which would make China, Iran & Russia crawl. Further, Wenninger 1987 and Partland 1992 (FRBNYQR) showed eMoney makes money supply unmeasurable. Minneapolis 1978 rational expectations has already showed pegging rates was destabilising, as interest is an exponent in Kagan's velocity when applied to the Fisher quantity demand equation. I inflamed Jerry Jordan at the 1997 Waldorf Cato conference by asking this. Some argued this was not immediately destabilising when rates were low, but oil suddenly changed that. There was this Dutch economist (not sure if it was Tinbergen) who got Nobel for saying policy should be split and localised, much like Mundell argued the 1971 oil shock cure was tight money and tax cuts; In the same vein, many have been arguing over the past year for increasing liquidity (Fed lending) but raising rates. The irony is many banks feared they would be signaling insolvency if they borrowed from the Fed. Bernanke, however, has an obsessive fear of the Great Depression, which is why Greenspan chose him as successor. He showed this recently when he said at NABE that paying interest on required reserves would set a floor on rates. He's really afraid how in Japan they cut rates so low, they had no more tools left. This is a paper he wrote with Vince Reinhart (who later quit because Bernanke was too inflationary) on what instruments could be used if rates went to zero.
Post a Comment
<< Home