The Fed Will Stop at 3.5%

by: Jon Heller, CFA

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.