Tuesday, October 16, 2007

More Rate Cuts on the Way

Are people really in that much denial that when the Fed Chief tells us housing will be a drag into 2008 it is a 'surprise'?
  • A deepening housing slump probably will be a "significant drag" on economic growth into next year and it will take time for Wall Street to fully recover from a painful credit crisis, Federal Reserve Chairman Ben Bernanke warned Monday.
  • Bernanke once again pledged to "act as needed" to help financial markets _ which have suffered through several months of turbulence _ function smoothly and to keep the economy and inflation on an even keel.
  • "Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks," Bernanke said in a speech to the New York Economic Club.
  • Against that backdrop, Bernanke said the central bank will be closely watching the economy's vital signs in determining the Fed's next move. He didn't specifically commit to cutting rates again, but rather kept his options open.
  • "The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.
  • On the inflation front, Bernanke noted that the prices of crude oil and other commodities have been rising and that the value of the dollar has weakened. Bernanke said the Fed will continue to monitor inflation developments carefully. Yet, with the limited information seen since the central bank's September meeting, the inflation barometers "are consistent with continued moderate increases in consumer prices," he said.
  • Fielding questions after his speech, Bernanke said, "Part of the reason that we have some confidence in inflation remaining well controlled is we expect to see the economy growing more slowly at the end of this year" and early next year.
  • The Fed's September rate reduction, Bernanke said in his speech, has helped ease "some of the pressure in financial markets, although considerable strains remain." He said Fed policymakers were prepared to "reverse" the rate reduction if inflation turned out stronger than expected. (yeh, right)
  • The Fed's next move will be determined by what is best for the economy, Bernanke suggested. As he has said previously, it is not the Fed's job to shield investors from the consequences of bad financial decisions.
  • Asked about what financial or economic information he would like to have but doesn't, Bernanke responded, "I'd like to know what those damn things are worth," referring in general to complicated financial instruments that repackaged debt _ bad debt, in some cases. (wouldn't we all, but any and all regulation is evil - even when it has the potential to take down banking systems - that seems to be the arguement - yet somehow we have these once in 10 generation blowups every 6 years)
So here is the kicker - the "non inflation" per government statistics is supposed to slow down the economy next year, which is the reason we can cut rates now. Interesting.

It is very clear from this we have 2 more cuts coming. I think 25 basis on Halloween is in the bag, and heck we might have another 50 coming. Now what I am interested in is how the next rate cut is seen - if its yet another "salvo of truth, justice, and the American way" and the markets rally, time to get back into helicopter mode and party. If its 50 it will definitely be party time, but if its "only" 25 (those party poopers at the Fed!), what is the reaction? But at some point won't people question why we need so many cuts if things are just so rosy (or will be in 6 months once we get through this very temporary housing issue). Or are we beyond questioning? It appears now we are only agreeing that housing will be an issue out to "early next year". So by May 2008 it will all go away? Then we can increase rates and all crisis is averted! Yeh... ok.

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