Will the Fed Cut Rates?

[DailyFX Forum Administrator]

Please join in our discussion of whether you think the Fed will cut or keep rates the same in the upcoming decision.

[DailyFX Analyst]

It's interesting no have it so far and I am part of the group. They key factor I think is that the data may not be quite bad enough to force the Fed's hand just yet. The full fallout from the sub-prime mess is likely to come later as housing sales slow to a crawl and consumer durables begin to take a hit.

The one factor that CAN change that scenario is a market crash. That would force the Fed to cut regardless of what they want to do.

What do you guys think?

[Antonio Sousa]

Fed Funds Interest rate futures can be used to calculate the implied probability of Fed actions at each of the FOMC meetings. A rate cut is widely expected but traders don’t agree in the amount. There is a 66% chance of 50 bps rate cut and 32% probability of just 25 bps.

In my opinion, the Federal Reserve will probably cut just 25 bps in the upcoming Federal Open Market Committee meeting, 25 bps in October and 25 bps in December (Slow and easy). The reason is simple. “Sustained moderation in inflation pressures had yet to be convincingly demonstrated” and a 50 bps has the potential to sustain those pressures and make the subprime problem a bigger one.

[Terri Belkas]

This is similar to what I said in the EURUSD room...but the huge drop we saw in US pending home sales this morning really highlights the weakness in the housing sector, and also signals that the worst is yet to come. As an index of contracts that have yet to close, today's report does not bode well for the NAR's existing home sales figure for the month of August, especially as more restrictive lending standards, including higher mortgage rates, will only quell already limited demand even further. Moreover, with weakness in the residential construction sector clearly persisting, it is even more likely to impact other sectors in the economy, supporting the case for a rate cut by the Federal Reserve on September 18th. I agree with Antonio in that they will take a slow-and-steady approach throughout the rest of the year.

Update to this post:
I just came across an interesting article in the WSJ about the impact of the housing slump on state and city budgets: http://online.wsj.com/article/SB1188..._us_whats_news

[NEWShawk]

http://www.seekingalpha.com/article/...will-cut-rates

[Terri Belkas]

NEWShawk, do you think they will cut?

[Euchre]

From a fundy perspective them cutting puts the US$ in a precarious situation. Riding multi-year lows cant be good with the Fx mkt looking for yield differentials. See US$ basket index

From a technical perspective Cable and Euro and bouncing against longer term uptrend/EMA lines.

Yen however is looking sick $/jpy gbp/jpy eur/jpy flashing continuation daily sells.

Equity mkts sell off = US$ strength for safe haven.

Equity mkts recover= carry trade resumes and yen and US$ sells off.

Hard to hear the R word with mkts < 10% from multi-year high's. Besides + GDP growth is + GDP growth period. The huge unknown is the next shoe to drop in the credit arena and who is exposed to sub-prime credit. If credit gets squeezed then all bets off.

FWIW

Euchre

Disclaimer Trading Currencies involves risk. Any opinion, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice.

[Terri Belkas]

Originally Posted by Euchre Equity mkts sell off = US$ strength for safe haven. Equity mkts recover= carry trade resumes and yen and US$ sells off.

We've actually seen quite the opposite today regarding the USD safe haven argument. Dow is currently down 1.37 percent, USD is down vs. EUR, GBP, and JPY. Now whether this pattern holds remains to be seen, but we could be starting to see a bit of a divergence.

I also wanted to mention the Beige Book release...the report indicated that the US economy continued to expand during the month of August, however, four districts (Philadelphia, Richmond, Dallas, and San Francisco) indicated that while their economies grew, the pace of activity had slowed. Nevertheless, by noting that outside of housing, the market impact on the economy was "limited," the Federal Reserve may not find that they have an urgent need to cut rates.

Do I think they should cut? Absolutely not. I think the correction should be played out sans intervention as to avoid moral hazard. However, I do still think that they will loosen policy before year end. I think we need to see how NFPs fare, but I also think that the most important factor remains the status of the credit crunch and financial market volatility. This will likely be the primary decision factor for the Fed.

[NEWShawk]

I think they'll lower. Whether that's the best idea is another story. Anyone see this article? http://www.msnbc.msn.com/id/20591430/site/newsweek/

It makes me laugh, all those Hedge Fund Managers and greedy wives...

[Terri Belkas]

Originally Posted by NEWShawk I think they'll lower. Whether that's the best idea is another story. Anyone see this article? http://www.msnbc.msn.com/id/20591430/site/newsweek/ It makes me laugh, all those Hedge Fund Managers and greedy wives...

lol, it took me a minute to see the "satire" part. But after Cramer's rant, something like that wouldn't exactly surprise me.

[DailyFX Analyst]

Originally Posted by NEWShawk I think they'll lower. Whether that's the best idea is another story. Anyone see this article? http://www.msnbc.msn.com/id/20591430/site/newsweek/ It makes me laugh, all those Hedge Fund Managers and greedy wives...

“The Million Mercedes March,”

RFLOL newshawk. Martin Luther King once said that in the US we have capitalism for the poor and socialism for the rich. While I don't believe that it sure feels that way sometimes .

Where do you think the Fed goes? I think after yesterday's ADP the pressure will be immense, unless NFP somehow impress to the upside.

[NEWShawk]

At this point I am not even going to try to speculate. It seems the market has begun pricing in a rate decrease considering the strengthening GBP and Euro.

Found this series of articles which goes over the credit crisis and how it all started - good to know: http://www.atimes.com/atimes/Global_.../II06Dj02.html

[David Rodriguez]

The real question is whether or not interest rates will really matter as it relates to exchange rates. The chart below shows the EURUSD and the related interest rate 2-year swap spread between the EU and the US. Clearly the currency has tracked rate spreads between the two economies for quite some time. Yet we also notice that rates cease to matter when other concerns trump returns to capital.

If we take a look at mid-2006, the EURUSD started climbing higher despite the fact that its interest rate spread was actually worsening through the same period. We could just as easily see a disconnect between rates and currencies if market troubles defeat the search for higher-yielding pairs.

[Mohammed FX]

Originally Posted by DailyFX Analyst It's interesting no have it so far and I am part of the group. They key factor I think is that the data may not be quite bad enough to force the Fed's hand just yet. The full fallout from the sub-prime mess is likely to come later as housing sales slow to a crawl and consumer durables begin to take a hit. The one factor that CAN change that scenario is a market crash. That would force the Fed to cut regardless of what they want to do. What do you guys think?

I agree with you

[Terri Belkas]

Originally Posted by Mohammed FX I agree with you

Mohammed FX, do you see a risk that the Fed will be raising the probabilities of encountering moral hazard if they cut on the back of crash in the markets?