Rumors of Interest Rate CUTS Back on the Front Burner

Long time readers will know what we constantly talked about all fall and winter - the constant interest rate cuts from the Federal Reserve. Markets would trade +/- 2% on Fed days, because if the Federal Reserve cut rates it would solve all our ills. The market would rally, problem solved! We scoffed but that did not matter at the time because the crack addicts on Wall Street wanted their fix. Now in retrospect we see how clearly the cuts from 5.25% to 2.00% "solved" everything. Well what do you do when you've thrown almost everything at the system? You start talking up a new round of interest rate cuts. Because the first 3.25% didn't help, but this next 2% we have left will. No, we are not following the path of Japan with zombie banks, bailouts, and interest rates heading to ? 0%? 0.5%?

• Though there’s virtually no chance the Fed will change interest rates at its meeting next Tuesday, there’s a growing likelihood it will make subtle changes in the language of its policy statement, placing greater emphasis on the risks to growth than the threat of inflation.
• And that may be the first step in a stunning policy reversal that could lead to yet another interest rate cut at the end of this year or early 2009, a move widely considered out of the question as little as a week ago. “There's powder left,” says Robert Brusca of the Fed’s monetary policy ammunition.
• In addition, two of the hurdles to a future rate cut have been lowered if not removed altogether. At about $100 a barrel, crude oil prices are down by a third from their record high of $147.27 on July 11, while the dollar has risen 11 percent from its record low of this year.
• After the Sept. 16 meeting, the next one comes Oct. 28-29, less than a week before the general election, probably too soon in the economic cycle as well as too close to the election itself to recommend any drastic action. The Fed does not meet again until Dec. 16, by which time the verdict on the holiday shopping season may be in (Awad’s point), as well as two more months of labor market data and all three readings of third-quarter GDP, the first of which comes Oct. 30, right after the FOMC meeting.

Remember, everyone is attacking Uncle Alan Greenspan for taking rates to 1% which was the underpinning for all this mess we have now. I've constantly said in the fall and winter the current policies and "solutions" will cause the next round of bubble. We seem never to learn from our history since we cannot handle any near term pain. The crack addict needs his fix. And now that oil has dropped we can begin the next round of rate cuts. I will tell you this, Uncle Ben is a student of the Great Depression. If he dares to cut rates he fears one thing - deflation. The celebrating is already beginning in corners of NYC... "dare we get it? more cuts? more free money?" Now, even more ironic is if the dollar rallies in the face of this... "they will find" a way to explain it - ah, the US is most responsive and these cuts - which caused the dollar to tank all fall and winter are now the salve to our problems - because it will allow the US to recover first! So buy the dollar! ;) It will boggle the mind how a 1.5% or heck 1.0% interest rate will attract currency traders to the dollar, but at this point there appear to be far greater forces at work (Invisible Hand) as moves of late have been completely nonsensical... greatest bailout in financial history? Great for the dollar!

Just remember, not 8 weeks ago the markets, in all their wisdom, were pricing in interest rate hikes post election. Now 2 months later, its back to cuts. Yes - the market can clearly see 6 months ahead and is a discount mechanism. Not.

So here is the bulls game plan - on any down day from here on out the rumors will begin to circulate about emergency Fed meetings and rate cuts coming. It worked all fall & winter anytime someone needed a reason to rally - so no reason not to drag it out.

Then in 6 years when we have our next bubble, we can come back and yell at the Fed for cutting rates so low and causing a bubble in "ABC" sector. The more things change...