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Five Reasons Why the Fed Won’t Cut Rates

Posted By Barry Ritholtz On August 22, 2007 @ 3:37 pm In Credit,Federal Reserve,Fixed Income/Interest Rates,Psychology | Comments Disabled

The Fed assumption made by many is that its a sure thing that Bernanke and the FOMC are going to give into the whining and pleading and crying and begging and beseeching and howling and weeping (In Yiddish, its called "kvetching [1]") from the anti-free market cry-baby commies currently residing in positions of influence on Wall Street and the media.

Therefore, goes this line of thinking, we should expect rates cuts in September and beyond.

Not so fast, says the WSJ’s Marketbeat [2]. They assembled a short list of 5 reasons as to why a rate cut won’t happen — least not at the September meeting:

Why the Fed Won’t Cut Rates

1. Official on-the-record Fed commentary: St. Louis Fed head William Poole and Richmond Fed head Jeffrey Lacker have loudly argued against it. with Poole saying a “calamity” is required first, and Lacker noting the impact on consumers is “relatively small."

2. Off-the-record whisperings: Fed reporter Greg Ip wrote [3]: while “officials acknowledge conditions are far from calm,” they cited stable stock prices, “a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.”

That doesn’t sound like a monetary policy committee that’s ready to lower rates.

3. What’s Been Done So Far: Through open market operations, the Fed has maintained a lower funds rate than the 5.25% target for the last couple of weeks. In addition, the Fed reduced the fee on lending from the System Open Market Account

4. Key economic indicators: Official household unemployment rate in July was 4.6%, which was up from the yearly low of 4.5%. Generally, it takes at least a change of 0.2 percentage points in this rate for the Fed to act, notes Ashraf Laidi, head of forex strategy at CMC Markets. Meanwhile, the year-over-year rate of consumer inflation still remains above the Fed’s upper target of 2%.

5. Moral hazard: Comments by Messrs. Poole and Lacker and the Fed suggest they are reluctant to be seen as bailing out hedge funds and other Wall Street players who became too intimate with leverage.

Go read the entire thing.
(Coming later this week: 5 reasons why they will cut rates).


Five Reasons: Why the Fed Won’t Cut Rates [2]
David Gaffen
Marketbeat, August 22, 2007, 12:02 pm

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/08/five-reasons-why-the-fed-won%e2%80%99t-cut-rates/

URLs in this post:

[1] kvetching: http://dictionary.reference.com/wordoftheday/archive/2002/06/01.html

[2] WSJ’s Marketbeat: http://blogs.wsj.com/marketbeat/2007/08/22/five-reasons-why-the-fed-wont-cut-rates/

[3] Fed reporter Greg Ip wrote: http://online.wsj.com/article/SB118775079167904991.html

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