Everyone is buzzing about tomorrow’s Fed meeting. The question seems to be will there be a .25% or .5% cut to the Fed funds rate (currently at 5.25%)? Most are weighing in at .25% but some are predicting Bernanke goes big with a .5% cut. Personally I question the effectiveness of any rate cut in smoothing out problems in the credit markets. And I’m not alone. While most Wall Street firms are calling for at least a .25% reduction (wonder why with the CDO meltdown?) some cooler-headed folks question the help it will provide to the market:
The odd man out is Scott Anderson, senior economist at Wells Fargo Economics.
Anderson argues that the Fed should not lower the Fed funds rate, but said they will just for the “psychological effects it could have on financial markets.”
“A Fed Funds cut will not bring back the U.S. housing market. A Fed Funds cut will not bring back the commercial paper market,” Anderson said.
If the housing market remains depressed, the markets “will ask for another rate cut, and another, and another, and another…and then what?” he asked.
Well put.
According to John over at Shadow Government Statistics the effective Fed Funds rate is already around 4.75% reinforcing the idea that any cut will be more for show.
From one of the bazillion Market Watch articles on the conjecture:
Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some are attracted to the somewhat strong move of a half-percentage point.
“While the arguments favoring a bold move are compelling, we believe the chances of a 25 basis point cut carry a higher probability,” said Michael Moran, chief economist at Daiwa Securities America Inc., in a note to clients.
Moran gives three reasons for a smaller move. First is concern about the appearance of the Fed being too quick to protect lenders and investors; second are doubts that the economy will weaken sharply and last is nervousness about inflation.
So my call would be that we are going to see a quarter-point reduction to 5.0% but question its ability to help anything, and wonder aloud what greater risks it may flirt with. What are your thoughts?
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[Source: Blown Mortgage]
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