It's Fed Decision Time Again: Will it be 0 or 25?

It’s Fed rate decision time again.

However, unlike the last meeting in September when the predictions on what the central bank would do were focusing on how much, not if, this time it’s a little bit uncertain.

The August negative job report released in early September, which probably have played a key role in the 50-basis point rate cut decision, turned out to be a false alarm. The credit squeeze appeared easing, though big banks wrote down billions of dollars of assets tied to bad loans. And the economy grew a solid 3.9% last quarter despite the turmoil in the financial market in the summer. Consumers are still spending, although the housing market slump continues, and oil price reached a record high.

What we need right now is a policy that will prevent the economic environment from worsening, not a cure for what has already happened. Another 25-basis point reduction could offer an assurance that the Fed is determined to stay ahead of any potential economic weakness.

So 0 or 25? My guess is 0 this time. The surprising larger-than-expected cut from last month may need a little more time to walk through the economic chain and show how it affects the economy. Plus, I don’t want to see my bank’s savings rate drop again.

Comments

[Malkiel:]

First, let me congratulate you for sticking your neck out. It takes guts to make a clear prediction the morning of the event--like wearing a bull's eye...

So why didn't they do it your way? My guess would be that part about "What we need right now is a policy that will prevent the economic environment from worsening, not a cure for what has already happened". There seem to be 2 types of analysts--those that get the mortgage/credit crisis, and those that don't. If you think the lending crisis is over except for the mopup, or that it isn't significant compared with employment data, you don't get it. Large numbers of ARM mortgage resets are going to happen month after month from October through the next year and a half; the market's recent volatile behavior is what it looks like when the market is factoring it in (that is, most of them are starting to get it). And the 25bp yesterday shows the Fed got it, and their accompanying statement shows that they're trying to educate us on the limits of what they can do about it...

2007 Nov 01 05:20 PM