Saturday, April 26, 2008

End of the road for FOMC rate cuts; Pause to come?

Consensus feels, due to rising inflation pressures, a slowdown in unemployment figures, a rising equity market and a less volatile credit market, that the FOMC may be towards the end of their rate cutting and many now feel a "pause" will be in order (either this time - April 30th or next - June 25th)


Dollar Rallies on Fed Rate Pause Speculations

The dollar rallied in NY trading Thursday following a WSJ report that the Federal Reserve may signal an interest-rate pause at the next FOMC meeting due to inflation concerns.

A Wall Street Journal report by Fed watcher Greg Ip said the Federal Reserve may cut the federal funds rate by 25 basis points next week and then keep the rate steady from there.


The Case For Dollar Strength?

The FOMC-There’s evidence that policy makers may want to pause now in order to give the actions they have already taken time to work their way into the system. Fed Governor Kevin Warsh said last week that as credit markets begin to operate more smoothly, more of the Fed’s interest-rate cuts will filter through to the economy. "The problems afflicting our financial markets are indeed long-in-the-making," he said. "Time is an essential tool of our policy response."

There have been some remarkable changes recently in how the market sees the FOMC members making policy changes at the April 29-30 meeting and beyond. Four weeks ago, traders saw a 72% chance for a 50 basis point move in April and a 28% chance for 25 basis points. Last week, traders began seeing no chance for a 50 basis point cut and now see an 18% chance the Fed will make no move at all (the rest of the bets are for a 25 basis point cut, which is the outcome that is most likely). What’s more, the chances of the Fed going below 2.0% on the overnight rate are decreasing rapidly-there currently is a 69% chance that the Fed will make no move at all at the June meeting. This doesn't mean the Fed is necessarily finished adjusting policy, but rather a that period to pause in order to assess the effectiveness of the policy changes that have already been made seems to be in order.


U.S. stocks set to face a sterner Fed

U.S. stocks will face renewed pressure next week, with investors facing not only another heavy week of earnings, but also key data that may confirm the U.S. economy is in recession and a Federal Reserve increasingly expected to pause its campaign to lower interest rates

Although many commentators are talking as if the Federal Reserve has already decided to cut interest rates by a quarter-point rate cut next week followed by a pause over the summer, there is a chance the Fed could instead decide to just pause right here, Fed watchers said



My thoughts:

I don't buy it, as there are still far too many uncertainties out there for the Fed. I expect a 25Bp cut this time around followed by another in June (or an emergency cut if warranted beforehand) and a 1.25% rate by the end of the year.

Certainly we may see a small dollar rally beforehand, but I expect the USDX to easily fall below 70 this year as the fed continues to add fuel (liquidity) to the raging economic fire.

We are nowhere near the end of this housing/credit/insolvency crisis and think ZIRP (Zero Interest Rate Policy) is not out of the question in our future. Each time a new crisis erupts, the fed will print/cut/inject in an effort to contain it, but will eventually run out of monetary ammunition... That's when the real hyperinflationary fireworks will begin.

Again, we're no where close to the end of this financial crisis: Will the Fed Cut Rates again? ; Ushering In a New Economic Era

Regards
Randy

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3 Comments:

At 4/26/2008 2:25 PM, Anonymous Sid R Real said...

So, below 70 on the DXI... is your thinking 69.9, or 50? (or zero?)

The market's have sure changed over the past decade or so, by my count we should be somewhere around 9k on the Dow.
($550 for GOOGLE? c'mon!)

But it sure looks like this current market doesn't let pesky little things like facts get in the way of it's rally. (Tell me again why we're not reporting M3?)

Sid

(P.S. man.. those 'captcha' images are getting hard to read, someone must've invented a char. rec. program or something.)

 
At 4/27/2008 9:05 AM, Blogger Randy said...

Hey Sid,

I'm thinking mid 60's this year and 50's next, but ultimately (long-term) zero as the Fed hyperinflates the dollar into oblivion.

Agree with your 9K Dow comment.

Didn't you get the word on M3? (BTW: I know you know so this info is for the benefit of others)

The Federal Reserve Bank’s official reason for eliminating M3 was: “the cost of collecting the underlying data and publishing M3 outweigh the benefits.”

Absolute BS!!!!

A more likely reason for M3 discontinuance is dollar devaluation.

Eliminating the M3 series allows the Fed to print the dollars needed without anyone knowing how many were printed.

Of course, as more dollars are created beyond demand, they eventually become worthless, but by hiding how many dollars are in circulation, the Fed is trying to prolong the dollar’s value.

Regarding the "captcha" images. You arent kidding. I typically have to try 2-3 times before getting it right.

Thanks for posting Sid

Randy

 
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