Why on earth the FOMC would want to undue any of the work by Treasury with a rate cut?That is the current market bet, that a 25 or even 50 basis cut may occur at tomorrow’s Fed meeting.

That would be ill advised.

We have survived the initial impact caused by the collapse of Lehman Brothers (LEH). AIG is certainly in trouble,  as are Wachovia (WB) and Washington Mutual (WM) and others.

The Fed would be well served, with rates now at 2%, to keep some powder try for the latter innings of this crisis.

Unless we are looking to emulate Japan’s 15 year recession, a ZIRP/pushing on a string policy would not be advantageous.

Category: Bailouts, Federal Reserve, Fixed Income/Interest Rates, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

69 Responses to “A Disasterous Rate Cut ?”

  1. Jeff M. says:

    Barry – need I remind you about a little event called the elections on Nov. 4th? Hence, the rate cut is going to happen very soon. It’s all about politics and power at this point.

  2. Bruce says:

    Damn it Barry, you and I posted the same thing at the same time. See post prior to this.

    If your cracked mind works like my cracked mind, you are in more trouble than Fuld…

    Bruce in Tennessee

  3. leftback says:

    Agree completely, not to mention the effect a cut might have on the winter heating bills. We don’t need another commodity spike now.

    But, Barry, it’s Bernanke, you know his history and his obsession with the Depression … so the market is smelling a rate cut. He cannot do it in October, too close to the election, so he might well go for one now rather than sit on his hands until November.

    Of course if the Fed don’t ease …. look out below?

  4. Concerned Citizen says:

    Would a rate cut really mean a market rally? Are the Bulls that dumb? Push on…I mean pull-on this string Bulls!!! :-)

  5. It’s been commented elsewhere, though, any takes on the U.S. being the new home of ‘carry trade’ funding?

  6. Mark W says:

    When all you have in your toolbox is a hammer, all your problems look like nails.

  7. Jeff M. says:

    Am beginning to think the market won’t truly fall apart until after the elections. Weak consumer spending on the holidays will put the final nail in the coffin in January just in time for the Inauguration. Good luck to whoever takes the oath that day. He’s going to need it, are the rest of us.

  8. ardan says:

    I think a Fed rate cut in here would be perceived as a negative. Agree with those who say wait. Hopefully Buffet will work out a deal for AIG and the Feds have a bias towards backing depository institutions, think WaMu and Wachovia. Still don’t know how derivatives are really trading…Fed should just keep pumping the system with cash and leave rates where they are.

  9. Eric says:

    Oh, Barry, didn’t you hear? The WSJ told us that Bush has done a fine job with the economy. I think we can trust that our President and his appointees know what’s best. Stop kibitzing.

  10. mickslam says:

    I disagree.

    This is the crisis, people. There isn’t anything worse that might happen. As cuts take 9 to 18 months to get into the economy, now is the time to cut if you think the last innings are going to happen in 2009!

    A 25bp cut would be worthwhile at this point as showing the markets the U.S. govt is united in seeing this crisis end as soon as possible and will do anything – anything – to make it all right.

  11. brion says:

    “rate cut…That would be ill advised”

    as clint eastwood might say, “advising aint got nothin to do with it”

    as robert duval might say “I love the smell of capitalism in the morning”

  12. Eric says:

    Anyone else here recall Ben Stein’s assertion in the NYT that only reason the market was tanking in early 2008 was because the powers that be on Wall Street wanted it that way?

  13. differently, the sooner BB gets to ZIRP, the sooner he can ‘come clean’, announce: “we tried everything we could, we need the help of our Neighbors, please trade your FRNs for New/Better/Stronger Ameros”

    Summary: It’s time to integrate further with Canada and Mexico, not separate from them.

    Robert A. Pastor is a Professor at and Founding Director of the Center for North American Studies at American University. He is currently writing a book entitled The North American Idea.

    ——————————————————————————–
    Of Related InterestTopics:
    U.S. Policy and Politics
    The Americas

    ——————————————————————————–
    On January 20, 2009, if not before, a new national security adviser will tell the incoming president of the United States that the first two international visitors should be the prime minister of Canada and the president of Mexico. Almost every new president since World War II has followed this ritual, because no two countries in the world have a greater impact economically, socially, and politically on the United States than its neighbors. The importance of Canada and Mexico may, however, come as a surprise to most Americans, as well as to the new president. In the presidential campaign, instead of discussing a positive agenda for North America’s future, the candidates have focused critically on two parts of that agenda, the 14-year-old North American Free Trade Agreement (NAFTA) and immigration. And overall, one could conclude from listening to the campaign that Iraq is key to U.S. national security, China is the United States’ most important trading partner, and Saudi Arabia and Venezuela supply most of the United States’ energy.

    http://www.foreignaffairs.org/20080701faessay87406/robert-a-pastor/the-future-of-north-america.html
    http://www.foreignaffairs.org/search/search?Sort=Relevance&ArticleAuthor=&ArticleType=&Full+Text=north+american+union

    “Foreign Affairs”, ya gotta love that title. They’re, truly, Genius.

  14. Mort Glickman says:

    Cutting rates is all they know how to do.

  15. km4 says:

    The Republicans, the party that wrecked America.
    http://jameshowardkunstler.typepad.com/clusterfuck_nation/

  16. johnnyvee says:

    Rate cut now? Probably not. The Fed will use its last 4-bullets when the market starts to dive. Short selling rules will come first, which makes me crazy because it is like blaming sports betting for the result of the game. Nothing good can come from preventing the market from realizing losses.

  17. Bruce says:

    Mickslam…

    2 per cent is much lower than inflation…there is absolutely no need to cut…

    “and will do anything-anything- to make it all right”…Ummmm, that could also be looked at as Desperation….

    further rate cuts won’t help…others have said it is not now a liquidity problem, it is a solvency problem…some truth to that..

    Bruce in Tennessee

  18. scorpio says:

    the Fed and Treasury just trying to drag the bodies across the Nov 4 finish line intact, just long enuf to insure another 8 yrs of tax avoidance by the wealthiest institutions and people in this country, not to mention permanent war

  19. Shuggie says:

    they are not going to cut. The hawks will not allow it so look for an unchanged rate with a dovish statement and no desents

  20. rj says:

    Kudlow stated this morning he’s against a rate cut. :)

  21. Drew Matus says:

    Fed funds trading well above target

    The actual trading level of Fed funds is well above the Fed’s target rate of 2.00%
    (although they have declined in the wake of additional Fed actions). Repo transactions are trading above the Fed funds target but are well below the current
    quoted level of Fed funds. This move in Fed funds is occurring despite the
    combined $70 billion in bank reserves added by the Federal Reserve for which
    primary dealers submitted bids for $270 billion. The high level of Fed funds likely
    represents heightened caution by banks to lend between banks on an unsecured
    basis in the current environment and is a measure of financial stress.

    PDCF, Discount window borrowing likely this afternoon

    It appears likely that the Federal Reserve will see significant demand for funds via
    these new facilities later in the trading day as yesterday’s announcements made
    clear that the Fed expected these facilities to be used. This should help to reduce
    the traded rate of Fed funds later in the day as these bank reserves reach the
    financial system. The existence of these facilities may explain why the Fed initially
    did not offer an excessive amount of liquidity through their normal open-market
    operations earlier in the morning. We continue to expect an ease tomorrow as
    pressures remain in the banking system.

  22. Concerned Citizen says:

    mickslam, we are already at negative interest rates. I thought I heard somewhere that the FED always wanted to keep the funds rate .25 above negative rates. If that is true then we are already behind the eight ball. Your suggesting we get behind the eight ball even more???

  23. devin says:

    Bruce,

    I’m with you. Rate cuts do nothing if it’s a monetary issue.

  24. larster says:

    Now that we have everything riding on one bank, maybe BB wants to increase the spread for Kenny Boy. However, I agree w/you and the spread will be ours as they drive it home. Seriously tho, does anyone think of the long term damage that is being done to muncipatities, states, corporations and individuals retirement plans. How does anyone fund retirement in a declining market w/ a 2% prime? Thank god I retired 7 years ago.

  25. Alan says:

    Republicans wrecked America….riiiiiight

    They installed cronies at Fannie/Freddie like Gorelick….riiiiight

    They blocked reform at F&F like Barney Fwanks and Chuckie Schumer….riiiiiight

  26. Ralph says:

    Think election cycle!!!

    Yes, it is a sad commentary but I really think this is true. It is about winning the power seat.

    P.S. So, where is good ole Goldilocks??
    Oh that’s right. That is a fairy tale.

  27. Kirk says:

    Agreed. Rate cut now would be USELESS! UTTERLY USELESS! As a wise man once said…”perception is reality”…

    And a rate cut would give the WRONG IMPRESSION right now!

  28. km4 says:

    John McCain Still Insisting The Economy is Fundamentally Sound

    http://www.youtube.com/watch?v=igAmVs0cvY8

    Once again, John McCain just doesn’t get it.

    “Today of all days, John McCain’s stubborn insistence that the ‘fundamentals of the economy are strong’ shows that he is disturbingly out of touch with what’s going in the lives of ordinary Americans. Even as his own ads try to convince him that the economy is in crisis, apparently his 26 years in Washington have left him incapable of understanding that the policies he supports have created an historic economic crisis,” said Obama campaign spokesman Bill Burton.

  29. DD says:

    Hand in your AIG stock at the Fed Window for cash.

    Aint nothing but Hank Greenberg gonna save us now…

  30. Alan says:

    If the end of the world doesn’t come soon, I may have to play some golf. This is quite boring. Anyone else up on the day?

  31. John(2) says:

    Off topic, but politics creep in here from time to time, I talked to a guy I know who makes his living as a financial advisor this morning. He’s a dyed in the wool Republican, not a mild sceptical one like me, and he fessed up this morning that they screwed up big time. He’s struggling with idea of voting for McCain, I’m in a state of shock. Back on the fed rate, I don’t think they will cut but we’ll find out. One little factoid that has gotten missed in all this morning’s excitement is the fall in manufacturing output, 1.1% when they were expecting only 0.3. It’s going to be a miserable 12-18 months so get used to the idea. We can still cheer ourselves up with little comedy routines like the one by Laffer and Moore in this morning’s WSJ. Who do they aim this material at is the question I always ask myself after reading it.

  32. donna says:

    Rate cuts don’t fix insolvency, sorry. Why would they do that?

  33. Vermont Trader says:

    Remember Japan took 5 years to even admit that there was a a problem with bad loans and 5 more to start fixing it. We are moving much faster than that.

    I am always impressed with the way American style capitalism keeps moving forward.

    I don’t think the FED will cut rates until the previous rate cuts start to be passed through.

    This is all about buying the financials more time in the hopes that they can earn more in the next 3 years than they have to right down..

    Seeing capitulation across the board today by the sell side… That at least is a positive

  34. Youngtrader says:

    @it is like blaming sports betting for the result of the game

    Well-said.

  35. John(2) says:

    Alan | Sep 15, 2008 12:49:41 PM

    I see this entire problem is due to Gorelick, Schumer and Barney Frank. I think you might be just slightly overestimating the powers of this evil trio. Of course there’s always the supreme dark lord………..CLINTON……aaaaarrrrggggghhhhhhhhh.

  36. Alan says:

    Speaking of politics, those Lehman boys are gonna have trouble maintaining their top donor status to Obama, now that they is kaputnik. The Lehman boys’ investments in the financial and political arenas seem to be quite stinky lately.

  37. BobC says:

    We’re doomed.

    I’m beginning to think that no one knows what to do next. There are too many potential side affects and unintended consequences to any action – including that of no action at all – to make any reliable predictions. We are at an inflection point where the flapping of a butterfly’s wings will change the course of the future in an indeterminate fashion.

    Worse case scenario? McCain wins the election but dies before inauguration, leaving us with the economic acumen of Sarah Palin. That would be an interesting black swan event.

    Before you tell me to keep politics out of this, politics is very relevant at this juncture. Any decision by federal agencies are being made with an eye on the upcoming election.

  38. km4 says:

    The Reagan Economy of supply side economics and deficits don’t matter has finally matured i.e. we’ve all been trickled on with a golden shower.

    The GOP will be now known as the party that wrecked America !

  39. Alan says:

    John

    Billy was alright, I got rich under Billy once he decided he was wearing the pants around the White House and adopted the Gipper’s playbook. Then again, he left a few timebombs for others to clean up and suffer through. I don’t understand, though, why the latte-sippers were allowed to grab control of the party from Billy&co. Faux Marxism is fun in school, but has no place in POTUS.

  40. Jeff M. says:

    @Alan: So you prefer Bush’s version of “free market” capitalism then? Please, whose been running the show for the last 8 years anyway? Stop it with this clap-trap, will ya? It’s getting really old.

  41. Paul in NYC says:

    Nothing, absolutely nothing anyone does now can get Joe Main Street’s savings rate back in the positive. Watch more retailers begin to suffer. Watch NFP continue to rise.

  42. SteveC says:

    You have to ask yourself that, if unemployment were to rise further (which it will) and retail sales continue to head south (which they will), will the Fed stand pat? Not a chance. They will cut back 1%, don’t kid yourself. This is a self feeding loop, unemployment rises, more banks fail, causing more unemployment, causing more banks to fail, then FDIC fails, more bailouts, government prints more money…. Not a pretty picture.

  43. Concerned Citizen says:

    please people don’t make this into a political disscussion politics is too much about blaming the other party while stuffing their own pockets with Wallstreeet money. So neither party has any right to take any high ground!!!

  44. rj says:

    The “practical” Fed funds rate right now is running at 6%, 4% above the Fed’s stated rate as banks are hoarding cash and loathe to lend.

  45. Bruce says:

    Steve,

    Then why not go to 0%??

    Just wondering..

    Bruce in Tennessee

  46. Alan says:

    @Jeff

    Well, I’ve made enough to retire early under Bush, so no complaints there, either.

    Fannie and Freddie are disasters of unprecedented magnitude, though, and taxpayers will pay dearly for it. While there’s plenty of blame to go around, the smell is particularly odious on the hands of some Democrats who kept these rotting fishes lovingly under wraps for so long.

    Power brokers in Washington need to be cleaned out with a firehose as a last-ditch effort before we decide to hit the reset button on America.

    If fighter jock McCain and six-gun Sarah can put the rats back in their ratholes, I’m all for it.

  47. mickslam says:

    Hi Bruce,

    I am well aware of where inflation is relative to FF. We need the pedal on the gas right now. I disagree that we don’t need to cut, as I view inflation as the lesser of two evils.

    Also, about cutting and having it viewed as
    desperation, it will be viewed as more desperate when they cut in between meetings.

  48. Concerned Citizen says:

    rj, so let me get this straight: they hoard, which mean they are not taking advantage of the spread i.e bank profits going forward look very very bleak.

  49. John(2) says:

    Alan | Sep 15, 2008 1:19:33 PM

    So did I and so did a lot of Americans. The past 16 years are a reasonable test of economic management (and btw I don’t buy the argument the presidency has no impact on economic management it’s the most potent influence in a hundred psychological and operational ways)and Billy boy gets at least a B+ while his successor… well you decide. You sound a reasonably sensible guy so spare us all the latte sipping bs, and cheap shots at Fwank when the Republicans have been in control of the presidency for the last eight years and the congress for 6.5 of them. This problem, as has been said a million times here and elsewhere, has its roots in cheap money, a hands off regulatory climate, a financial industry that created doomsday machines it didn’t understand itself, and fiscal irresponsibility. Trying to blame bit players like Gorelick is simply absurd and detracts from any solid arguments that you might advance. If I may say so.

  50. SteveC says:

    I didn’t say I agreed with it, just how I plan to trade it. The Fed is a political institution at the end of the day. They’re trying frantically to avoid a depression. Alan G. tenure is behind all of these problems in my mind.

  51. mhm says:

    “This is all about buying the financials more time…”

    And that is all about it. If more people could understand the basic stimulus-response and the response decay over time mechanism we all would live a better life.

    Off-topic but this “I’ll vote for X because it is not Y” type of reasoning, regardless of X, is quite infantile. Show your adulthood by stating why X by means of X qualities.

  52. Concerned Citizen says:

    John2, its a slippery-slope argument on boht sides of the political spectrum. Drop it!

  53. Stuart says:

    The Fed will NOT be pleased with those industrial production stats this morning…. Can easily see them cutting.

  54. dd says:

    Everyone here is pointing a finger….

    as usual

    How about a solution for a change ?

  55. Bruce says:

    Thanks Mickslam for the thoughts…

    I suppose you could be right, just not the way I look at it…

    I think, my opinion only, that further cuts won’t stimulate us much, but could seriously decrease the value of the USD…

    ..and I do think we need our creditor nations like Saudi, China, Russia to feel the value of the USD is not going to be further undermined….

    Just my thoughts here at this point of this ongoing crisis…

    Bruce in Tennessee

  56. Alan says:

    John-

    I just don’t have high regard for centrally planned economies given the long history of their failure and corruption. They always sound good on paper and always go belly-up in the end. Gorelick is a symptom of the disease, not a cause. Political payoffs hide and enable problems, while making payees like Gorelick rich off the taxpayer.

    As far as easy money goes, the solution is simple – free banking. Eliminate the centrally planned middleman, and the taxpayer no longer picks up the tab. You’ll still have crises, but the bill will go to those who deserve it, and political cronyism will have a less fertile playground.

  57. JL says:

    I just got home and have not caught up on my reading but I do have a question. Clark Howard was on my local radio and a caller asked him if his 1/2 million in cash funds was safe in AIG. Clark Howard said yes because AIG would fall under THE TOO BIG TO FAIL RULE. Do we have a new rule that I missed?

  58. Jeff M. says:

    @dd: Plenty of people on this blog have offered lots of potential solutions. Where have you been?

  59. leftback says:

    Posted by: Alan | Sep 15, 2008 12:58:51 PM

    “If the end of the world doesn’t come soon, I may have to play some golf. This is quite boring. Anyone else up on the day?”

    Some people probably would prefer that you play golf, Alan. Personally I think it is a good idea to play golf on and before FOMC day, and then see where the market is afterwards. Not only do you not have to worry about predicting what the Fed does but you also don’t have to worry about predicting market reaction.

    i think that mickslam is channelling Bernanke to some degree here: “if we don’t save it now, there might be nothing to save in November” might be the line of argument from FED doves, and the inflation argument of the hawks has grown weaker as we deflate like crazy.

    i just had a vision of 15% unemployment and Palin in the Oval Office, I need a drink.

  60. Jeff M. says:

    @Alan: Glad you’ve gotten yours. Good to see it’s just all about you. That’s part of the problem in this country. You’d fit right in with the Bowyer, Luskin, Sir Goldilocks, Westbury crowd.

  61. CNBC Sucks says:

    There is too much politics on this blog.

    If there is a rate cut tomorrow, how is the stronger dollar explained?

  62. That Guy says:

    “fighter jock McCain and six-gun Sarah”

    WTF??? Are we casting a Western or are we electing a president???

  63. Bruce says:

    DD…

    Solution is to quit being reactive and be proactive…

    I sound like an old fart, but the proactive solution is a balanced budget, either by amendment so we have to (my thought) or congress and the president come to the same conclusion…

    Bad: Hurts for a year or two…yep…hurts

    Good: Can’t spend more than we bring in…other countries realize we are now fiscally responsible…we are thought of like Switzerland or Germany as far as concern over deficits is concerned.

    Wars harder to get into…amendment would allow deficit spending only on wars declared by congress…

    Companies that make poor decisions allowed to fail…GM, F, Bear, Lehman….

    We bailed Chrysler out once…Lee Iacocca came to congress…at least a private entity now owns it as it will go belly up and they are not begging the taxpayer…

    What is happening is that the burden of the credit bubble is being shifted from corporations to the government( read taxpayer)…and in my opinion it has unnecessarily put government finances at risk without significantly solving the crisis…I guess I am in the minority..but you had too much easy credit and that boil has to be lanced…the government doesn’t seem to want to let the pus out….and I think this increases the risk that the government won’t be there for the INDIVIDUAL as they twist and turn trying to save the investment banks…government doesn’t have an unlimited supply of money.

    Bruce in Tennessee

  64. Concerned Citizen says:

    Alan, who would be left to grease the wheels of commerce if we had free banking? Banks are already going to be pinched.

  65. rj says:

    “rj, so let me get this straight: they hoard, which mean they are not taking advantage of the spread i.e bank profits going forward look very very bleak.”

    Just passing on what I heard on Bloomberg Radio and Hank Paulson’s news conference.

    It kinda went to the overall point though of what is the worth of lowering the Fed funds interest rate if the primary dealers are ignoring it? What’s the point of going down to 1.5% or 1.75% if banks are still going to lend money out only at 5-6%? The lower interest rate doesn’t help anyone except the people borrowing directly from the Fed.

  66. leftback says:

    XLF 20 has given way.. we are now opening up the possibility of a new leg down for the financials. Lovely day for the SKF guys again.

    Broad market making an interesting triple bottom formation right now, for those who enjoy bottom calls. Seriously, if 1215 level doesn’t hold in the last hour it is going to be ugly. TA types know the next stop down from 1175 is 1060.

  67. BobC says:

    I don’t understand the complaints about the political comments. It seems to me that it is impossible to understand the economic environment without including the obvious political factors. The economy is ultimately a messy amalgamation of rationally derived data and equations combined with irrational behavior of the masses, all boiled in the soup of political motivations. Personally, I abhor politics. But it MUST be part of my thinking. Ignore politics at your peril.

  68. The Election really is Important, if we pick the Right Two People, they’ll fix Everything. And, we can go back to being Spectators at the Coliseum.

    pick carefully, now~

  69. Alan says:

    Leftback-

    Your point is well taken. Predicting what centrally planned mistakes centrally planned bankers will make is rather futile for ordinary non-connected citizens _ I believe I will play golf and let the autopilot handle it from here.

    Concerned Citizen-

    In free banking, the most competitive and savvy capital allocators grease the wheels and are rewarded for their good work. The idiots perish and the cronies serve lattes, as their bureaucratic jobs don’t exist. The taxpayer is unencumbered to centrally planned banking decisions, at least.