The Fed Will Stop at 3.5%

Expectations are high that the Fed will continue to ratchet down interest rates to stem the credit crisis. Some pundits are calling for a sub 3% Fed Funds rate, and the futures markets are starting to reflect this. The markets love rate cuts, and stocks typically rally in in the aftermath. But watch out if market expectations are not met, ie. if the Fed does not cut as much as expected.

While we believe rates will be cut again starting on January 30th, we also believe that the Fed will ultimately stop around 3.5%. The threat of inflation is real, and consumers are already seeing this reflected in many goods they purchase on a weekly basis. Chairman Bernanke is an inflation hawk, as are many of the 2008 Fed members who have a vote, and we believe inflation fears will ultimately stop further cuts. Perhaps the damage has already been done.

Comments

[fxtrader07:]

Bernanke an "inflation hawk"?? Are you kidding me?? he has been one of the most outspoken fed-chairmen in history when it comes to use the printing press to avoid a deflation and/or recession at any cost!
That he didn't lower rates more aggressively so far (as Easy Al certainly would already have done) was in all likelihood more due to his ivory-tower origin and his inability to grasp the turue extent of the unfolding crisis rather than him being determined to "fight inflation". Alas, Paul Volcker was the last fed chairman doing so - and with the government debts rising

2008 Jan 15 06:24 AM

[fxtrader07:]

to ever higher levels any new fed chairman after bernanke will be installed with the clear task to inflate his way out of any problems. Make no mistake, bernanke might target inflation in his talk at times but in his actions you will not find any reflection of that. Greenspan perfected this and bernanke will follow suit.
rather than at 3,5% interest rates may in fact be dropped well below 2% before they start rising again.

2008 Jan 15 06:28 AM

[kkin365:]

How would lowering rate benefit the man/woman on the street? Today, the Bank of England refused to lower its rate -- I am all for this. As someone remarked over CNBC, Japan's interest rate was, for a long time, set at 0%. And Japan is just coming out of a 15-year recession. In this new world economy when USA is rapidly being marginalized, a lower interest rate is merely viewed as a reflection of a weak economy.

2008 Jan 15 02:56 PM

[Bill W.:]

Bernake is anything but an"inflation hawk"........does dropping money from helicoptors ring any bells$

2008 Jan 15 04:21 PM

[the final h...:]

hahaha what difference does it make? according to his 'core inflation': we have no inflation.

i guess he makes so much $$$$$$$ he doesnt buy his own food.

2008 Jan 16 10:19 AM