Posts filed under “Credit”

Five Reasons Why the Fed Will Cut Rates

Late August, we reviewed  Marketbeat’s Five Reasons Why the Fed Won’t Cut Rates.   

At the time, we noted they would present the opposing arguments.

Today is that day: Here are Five Reasons Why the Fed Will Cut Rates, according to WSJ’s Marketbeat:

1. Inflation isn’t out of control. The core personal consumption expenditures price deflator rose at a 1.9% annual rate in August, inside the Fed’s assumed preferred range for the rate of inflation (1%
to 2%);

2. Market conditions are still problematic. The
asset-backed commercial paper market remains knotted and credit spreads
in high-yield markets have widened out;

3. The market is expecting it. While the Fed isn’t
one to necessarily respond to bile-spewing yahoos on television
demanding rate cuts, it isn’t in the habit of ignornig the market as a

4. The housing market’s troubles warrant it. In Jackson Hole, Fed governor Frederic Mishkin presented a scenario
imagining a 20% decline in real house prices, and suggested that
faster, sharper cuts in the Fed’s targeted rate would minimize the
impact of such a downturn.

5. They have little to lose.  “Two or even three sequential ¼ point cuts will not create a re-kindled gambling spirit,”
writes David Kotok, chief investment officer at Cumberland Advisors in
Vineland, N.J. “Thus the Fed can cut without violating its proper
concern about ‘moral hazard.’”

My view of this?

Numbers one and two are quite valid; number three — the market wants/expects it — is irrelevant. Number 4  raises a problem that rate cuts won’t really help — the housing market is in trouble. Number 5 is pure unadulterated bullshit fiction.

Go read the full post.


UPDATE: September 4, 2007 8:44pm:

LOL — No no no no no!

That’s marketbeat’s views, not mine. Since I posted their 5 reasons the Fed WONT cut, I wanted to include this version so readers could see the other side of the argument, 

My view on inflation: its much higher than has been reported, and is being driven by a weak (over-printed) US dollar, and insatiable demand from China and India.

As the US economy slows, inflation should subside to more moderate levels — still elevated, but more moderate than the past few years. 

The quoted section is from the Marketbeat, and it is mathematically valid — that is in fact what the reported core inflation numbers are. As the comments point out, you already know what my view on core inflation is . . . 



Five Reasons: Why the Fed Will Cut Rates
David Gaffen
WSJ, September 4, 2007, 3:14 pm

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