Five Reasons Why The Fed Won’t Cut Rates

The Fed assumption made by many is that it's a sure thing that Bernanke and the FOMC are going to give into the whining and pleading and crying and begging and beseeching and howling and weeping  (In Yiddish, it's called "kvetching") from the anti-free market self-cry baby commies currently residing in positions of influence on Wall Street and the media.

We therefore, goes this line of thinking, should expect rates cuts in September and beyond.

Not so fast, says the WSJ's Marketbeat. They assembled a short list of 5 reasons as to why a rate cut won't happen -- at least not at the September meeting:

Why the Fed Won’t Cut Rates

1. Official on-the-record Fed commentary: St. Louis Fed head William Poole and Richmond Fed head Jeffrey Lacker have loudly argued against it, with Poole saying a “calamity” is required first, and Lacker noting the impact on consumers is “relatively small."

2. Off-the-record whisperings: Fed reporter Greg Ip wrote: while “officials acknowledge conditions are far from calm,” they cited stable stock prices, “a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.”

That doesn’t sound like a monetary policy committee that’s ready to lower rates.

3. What’s Been Done So Far: Through open market operations, the Fed has maintained a lower funds rate than the 5.25% target for the last couple of weeks. In addition, the Fed reduced the fee on lending from the System Open Market Account

4. Key economic indicators: Official household unemployment rate in July was 4.6%, which was up from the yearly low of 4.5%. Generally, it takes at least a change of 0.2 percentage points in this rate for the Fed to act, notes Ashraf Laidi, head of forex strategy at CMC Markets. Meanwhile, the year-over-year rate of consumer inflation still remains above the Fed’s upper target of 2%.

5. Moral hazard: Comments by Messrs. Poole and Lacker and the Fed suggest they are reluctant to be seen as bailing out hedge funds and other Wall Street players who became too intimate with leverage.

Go read the entire thing.
(Coming later this week: 5 reasons why they will cut rates).

Source:
Five Reasons: Why the Fed Won’t Cut Rates
David Gaffen
Marketbeat, August 22, 2007, 12:02 pm
http://blogs.wsj.com/marketbeat/2007/08/22/five-reasons-why-the-fed-wont-cut-rates/

Comments

[sliman:]

The Fed will cut because of the 90 day T bill rate.

2007 Aug 23 09:58 AM

[wixeywaxy:]

Number 5 is the clincher. If we don't see some of these hedge funds taking bankruptcy, the whole thing will come back to haunt us sometime later in a more serious way. The mortgage lenders were leveraged to the hilt but the hedge funds doubly compound the risk by using risky mortgages as collateral. If those who play these games and the parties that make it possible aren't wounded in these events the whole economy is threatened. Vic

2007 Aug 23 12:07 PM

[abitarecatania:]

The FED will cut, or people will foreclose and the FED is "in bed" with politicians and hedge funds.

2007 Aug 23 03:33 PM

[Paul Meisel:]

When the 90 day T bill is a full point below the Fed funds rate, a cut is logical. The market is telling you that inflation isn't really a threat -- hell the 30 year rate is below the Fed funds rate. We learn in economics that the risk-free rate should be inflation plus some "real" premium. Maybe the market thinks the premium is one point, or two, or whatever.... but the difficulty of the measurement of inflation and the false precision of a two percent goal (why not 1.8% or 2.2%) both say that the market action and the yield curve should tell the Fed when to cut. A lot of the "inverted yield curve" and "recession" appears to me to be the Fed acting too slowly, waiting for more (imprecise) economic data.

Disclosure: I was once a serious econometrics student. I left that field because I could never reconcile my personal standards for good work to the unfortunate difficulty in obtaining consistent and correct answers.

2007 Aug 23 04:48 PM

[huangjin:]

One of the big reasons for saying the Fed will cut is because the Fed's statement accompanying the discount rate cut didn't mention inflation. If Bernanke and company had changed their position on inflation, they would have mentioned it.

2007 Aug 24 08:53 AM