Fed Rate Cut Discussion Thread

[DcifrThs]

Evan & ahnuld,

this was just posted:

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Which is the thread for talking about the rate cut in general? This is likely to be a large topic.
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My thoughts have been that the Fed has become somewhat political, that they would not be able to stomach keeping rates as high as they must to curb inflation, therefore rates will be lower than they should and there will be a large amount of inflation over the next few years.

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I think this could serve as that thread.

personally, i dont thinkt he fed has become political (like those at CNBC who state the bush should command bernanke to come to the oval office to have a "discussion" about whats going on lol).

greenspan sure hurt markets when he foresaw a rise in inflation and hiked interest rates in 1994 (was a surprise).

why precisely do you think the fed can't "stomach keeping rates high"?

rates have been, and likely will be artificially low during the present and coming time periods. that artificially low rate of interest though reflects demand for US securities though more than the fed's target rate decision being influenced by some political agenda.

you are kind of implying that the fed is like the reserve bank of india (which is tied highly to the government). in India, rates are specifically low because the government wants higher growth than it wants to risk hurting growth to fight inflation.

on a scale of "central bank independence" issued by the economist, china and india both rank fairly low (i.e. banks aren't independent of govt). further, which i found interesting, the chinese and indian central banks are responsible for a vast majority of global money supply growth recently. each over two times the growth of money supply linked to the US.

anyways, i think the fed will likely cut rates ONLY if actual economic data and leading indicators imply the need for such a cut relative to capacity constraints we are currently under.

the market has 10000% priced in a september rate cut of 25bps.

markets have also priced in some % probability of a 50 bp cut. i don't have acces to options data but the fed funds futures rate is around 4.92% for september maturity.

i'd be short fed funds futures right now at 95.08. fed is not going to cut 50bps in sept. a 25bp cut would be unlikely in my eyes given the levels of production and the fact that industrial production AND capacity both came in over trend and consensus in July. unemployment ticked up to 4.6% last read which helps but despite that, the growth in production ate up those resources and pushed capcity up to 81.9% (very high, 82% is considered the "water mark" above which action must be considered).

i don't know if capacity lags unemployment by enough for that to make a difference (or at all), but without some good data that say this issue is coming under control, the fed should DEFINITELy not be cutting by 50bps.

a 25bp cut, while unlikely in my eyes, may still happen though as consumer sentiment came out a good deal below consensus (83 vs. 88) today. but i don't know exactlyw hat goes into that indicator. either way, that isn't a good sign overall. if other things come out to that effect, then a 25bp cut may become likely. but until that point, i just don't see the fed cutting.

there'd obviously be mad (both much and angry) talk of a Bernanke put also if they did.

Barron