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

Category: Credit, Derivatives, Federal Reserve, Inflation, Psychology, Real Estate

A Demon of Our Own Design

I previously mentioned A Demon of Our Own Design in a linkfest a few weeks ago. I enjoyed the book a great deal, and just about finished it over the long weekend.

The opening paragraph just reached out and grabbed me: 

Bookstaberdemon_jacket"While it is not strictly true that I caused the two great financial
crises of the late twentieth century—the 1987 stock market crash and
the Long-Term Capital Management (LTCM) hedge fund debacle 11 years
later—let’s just say I was in the vicinity. If Wall Street is the
economy’s powerhouse, I was definitely one of the guys fiddling with
the controls. My actions seemed insignificant at the time, and
certainly the consequences were unintended. You don’t deliberately
obliterate hundreds of billions of dollars of investor money. And that
is at the heart of this book—it is going to happen again. The financial
markets that we have constructed are now so complex, and the speed of
transactions so fast, that apparently isolated actions and even minor
events can have catastrophic consequences."

Terrific stuff.

Indeed, I enjoyed the rest of the book. Bookstaber was on the scene in the early days of many of derivatives now contributing to market turmoil. He rather deftly makes complex issues readily understandable, regardless of how much advanced mathematics you may have under your belt.

And, he names names. LOTS of names. All the usual suspects come under scrutiny, as well as a lot of folks who probably assumed they were not int he public eye. There will be a lot of people not very happy with his blunt, insider descriptions of the analytical errors made by major players — many of whom are still around today and in positions of authority and power. 

He also accepts a lot of responsibility for many costly errors he himself made.   

Overall, a fun, very informative read.

I was intrigued enough by the book that I contacted Bookstaber (the author) and Wiley (the publisher), and asked for their permission to reproduce the first chapter. They graciously sent me a pdf and text version, which you will find after the jump: All of chapter one, in both text form and PDF. I also included some mainstream media reviews after the chapter. 

I have pretty good relationships with many of the publishing houses — they all want to get a book or two out of me. Anyway, if it turns out you guys like this idea, perhaps we can offer up a book or two that I am reading every month in this same format. Maybe we can have an online reading group club — it could be a good place to have a full discussion. Share your thoughts.

Enjoy chapter one.

Disclosure:  No, I don’t accept money for this — it was my idea, and I approached the publisher and author about this — not vice versa. Please don’t start bombarding me with offers to promote books I am not already reading. They will be unceremoniously deleted without response.

As noted in our disclosure section, we don’t do payola here (if you click thru and buy it on Amazon, I do see some scratch).


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