What would a rate cut solve?
The Federal Reserve will cut its target overnight borrowing rate by a half percentage point to 1.50% at its meeting tomorrow, said Merrill Lynch economists David Rosenberg and Drew Matus in a note Monday. “In the current environment, the Fed may feel the need to get in front of the situation with a more aggressive move” instead of the standard quarter-point reduction, they said. Merrill (MER 19.30), one of the 19 primary security dealers that trade directly with the New York Fed, was bought by another dealer, Bank of America (BAC) overnight. “Recent events suggest a large deleveraging of the banking system is picking up steam and suggests the risks to the economy are entirely concentrated in the growth outlook,” Rosenberg and Matus said. Merrill analysts had previously expected the Fed to reduce rates in the first quarter as inflation subsided. “Inflation concerns will take a backseat, or move to the trunk,” they said. The Fed may also remind markets that the discount window and other liquidity facilities are available.
The problem out there is not the cost of credit (rates) but the availability of it. Bernanke could lower rates to 1% and it would not matter in any way other than causing inflation to spike and the dollar to fall.
In my recent interview with AutoNation (AN) CEO Mike Jackson he comment that “Fed rate cuts are not working like they have in the past”. Jackson said that is isn’t a question of the rate at which banks will lend at, it is a matter of them holding on to their liquidity (cash) and just not lending it at all. Typically lower rates spur demand for lending from consumers and businesses. There is plenty of demand for loans out there, banks are just not parting with the money they have.
Lower rates are insignificant here…
The only thing a rate cut would do is give a mental boost to the markets for a day. Then reason sets in and people realize the only thing another rate cut will accomplish is inflate prices, depress the dollar, and allow American’s to once again watch the price or oil rise going into winter.
There are times that the best things to do is nothing…this is one of those times.
Disclosure (“none” means no position):Long AN, none
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2 replies on “Fed Rate Cut Tomorrow? Why?”
I find it odd that you analysis is completely void of what a lower interest rate ‘would’ accomplish.
The fundamental problem right now is housing. If you fix housing, you fix the banks, and you fix the economy.
The rate cut isn’t to lower the cost of capital to companies. By cutting rates, the Fed may finally stablize the housing market and home prices. If it could have, the Fed would have done this sooner, but the inflation risks were too high. Now that we are finally heading into a recession, the Fed can go ahead and cut the rates because inflation isn’t nearly as dangerous as it has been.
Make people buy houses and this whole banking crisis is over. Unfortunately, the economy has already been killed – no avoiding a recession now.
anon,
you miss the point of the post. rate cuts are not doing what they have done in the past..lower mortgage rates..
the only thing that brought them down was the nationalizing of fannie and freddie…
banks are not loaning cash for houses or cars…period..