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Fed Watch: Where Is The Rate Cut?
http://economistsview.typepad.com/ economistsview/ 2008/ 10/ fed-watch-where.html
Tim Duy says the Fed may not cut the target interest rate at its next rate setting meeting: Where Is The Rate Cut?, by Tim Duy: On the surface, the case for a rate cut seems obvious. But, despite an extraordinary and historic two weeks on Wall Street, Bernanke & Co. have failed to deliver. And perhaps the lack of action today, a day of panic in global equity markets, is telling us something about policy – don’t look for a rate cut, at least not yet. Maybe we should be listening. If there is one thing the Fed has taught us in the last year, it is that they are inclined to meet periods of financial turbulence with a rate cut.
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Fed Watch: Just the Timing Is In Doubt
http://seekingalpha.com/article/98975-fed-watch-just-the-tim...On Monday, I opined on the Feds hesitation to cut rates when such a call should be a slam dunk. Why not step forward with the intermeeting cut? Could the Fed possibly have given up hope on rate cuts, and instead intend to focus on other policy measures?
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Secondary Sources: No Rate Cut?, Economic Divide, House Prices
http://blogs.wsj.com/economics/2008/10/07/secondary-sources-...A roundup of economic news from around the Web. No Rate Cut?: Writing on the Economists View blog, Tim Duy says the Fed may not cut rates. It is impossible to rule out a rate cut, and it seems like a cut should be the baseline case. Indeed, the case for
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Tuesday links: dry powder days
http://abnormalreturns.com/2008/10/07/tuesday-links-dry-powd...Extreme volatility does not favor the Euro; it calls their system into question. (Aleph Blog also Infectious Greed) Why the dollar is on a roll. (WSJ.com) The carry trade takes it on the chin. (Brad Setser, Alea) Iceland is a mess. (MarketBeat) Th
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Fed Watch: Only the Timing is in Doubt
http://www.rgemonitor.com/globalmacro-monitor/253928/fed_wat...Fed Watch: Only the Timing is in Doubt Delicious Digg Facebook reddit Technorati Mark Thoma | Oct 8, 2008 Only the Timing is in Doubt, by Tim Duy: Yesterday I opined on the Fed’s hesitation to cut rates when such a call should be a slam dunk. Why not step forward with the intermeeting cut? Could possibly the Fed have given up hope on rate cuts, and instead intend to focus on other policy measures? Fed Chairman Ben Bernanke today made clear that given the deterioration in the real economy, a rate cut was on the table: Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate. Moreover, the minutes from the last FOMC meeting indicated that there was already some thought to a rate cut “way back” in September: Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required; however, such a response was not called for at this meeting. Wall Street, however, was unimpressed by confirmation of an imminent rate cut. There appears to be no shock value in such news. Indeed, equity markets plunged even as expectations grew that a global coordinated rate cut is likely as early as Thursday, and if not then, this weekend. The Fed can only disappoint, it appears. Or perhaps market participants simply feel that lacking a functioning credit channel, rate cuts are now simply a sideshow to the financial crisis. I would not disagree. The Fed can provide infinite amounts of liquidity, but if it does not get into the hands of someone who will spend it, then it is just worthless paper. One argument against a rate cut is that it risks upsetting a very nice little equilibrium the Dollar has shifted into as global deleveraging in the financial sector looks to be forcing a rapid unwind of Dollar based carry trades. The more stable Dollar, and the subsequent downward pressure on commodity prices (with the exception of gold), eases the US inflation outlook, which in turn gives the Fed room to cut rates. The pressure to ease, coupled with pressure to sustain the Dollar, thus argues for a coordinated cut, as 50bp across the board would leave interest rate differentials unchanged. In theory, this would allow the Dollar to hold it ground while delivering the easing that everyone expects and expects to be meaningless (although it provides grist for bond traders). Of course, 50bp is all the Bank of Japan has to give, so it takes something of a leap of faith to see them go along with such a plan. Current Dollar supportive dynamics notwithstanding, the path of monetary policy is placing the Dollar in an increasingly perilous position – if credit channels refuse to loosen, the Fed will be driven inexorably toward policies that attempt to place cash directly in the hands of those that will spend – such as today’s leap into the world of commercial paper. And as the Fed draws more and more risk onto its balance sheet (as well as the US government, via TARP), its credible commitment to price stability will be increasingly in doubt. Will outright monetization soon be the only remaining option if the Fed is under pressure to restore spending power to the US economy? Is outright monetization really off the table at this point? Consider that Bernanke is widely thought to be determined not to make the same mistakes of the Fed of the 1930’s. Consequently, he has pulled out all the stops, cutting rates quickly and lending freely on a wide range of collateral. But the credit crunch continues unabated, as this is not simply a panic, but a massive deleveraging brought about by fundamental insolvency. Recession is now unavoidable, and the length of the downturn grows longer with each day the credit markets are constricted. Short term interest rates are headed toward zero, suggesting a liquidity trap. What options are left? Bernanke must have at the back of his mind the incident that many believe ended the Great Depression – the 1933 devaluation of the Dollar as the US left the gold standard. Certainly outright monetization would bring such an end; and going back to the Great Depression has been a good way to look for Bernanke’s next move. Maybe this is getting ahead of ourselves; maybe not. I think it is important to remember that as we head into next year with a profoundly weakened consumer, the calls to “do something” will be increasingly louder. Actions to date have centered on fixing the financial system; the billions in debt soon to be issued for TARP are not likely to flow into the hands of ultimate demanders. And if credit channels remain broken even after these efforts, near-term options to support growth are limited. Monetization of deficit spending is one such option. Bottom Line: The stage is set for a rate cut; only the timing is at issue. If a rate cut does not come via coordinated fashion by next Monday, it is safe to assume that the Fed intends to move rate policy back to its regularly scheduled meetings. The Fed’s apparent hesitation to cut in the midst of a significant equity sell-off (13% on the Dow in five days) and credit collapse is puzzling given their past behavior. Originally published at The Economist's View and reproduced here with the author's permission. Delicious Digg Facebook reddit Technorati
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Fed Watch: Only the Timing is in Doubt
http://www.rgemonitor.com/financemarkets-monitor/253928/fed_...Fed Watch: Only the Timing is in Doubt Delicious Digg Facebook reddit Technorati Mark Thoma | Oct 8, 2008 Only the Timing is in Doubt, by Tim Duy: Yesterday I opined on the Fed’s hesitation to cut rates when such a call should be a slam dunk. Why not step forward with the intermeeting cut? Could possibly the Fed have given up hope on rate cuts, and instead intend to focus on other policy measures? Fed Chairman Ben Bernanke today made clear that given the deterioration in the real economy, a rate cut was on the table: Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate. Moreover, the minutes from the last FOMC meeting indicated that there was already some thought to a rate cut “way back” in September: Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required; however, such a response was not called for at this meeting. Wall Street, however, was unimpressed by confirmation of an imminent rate cut. There appears to be no shock value in such news. Indeed, equity markets plunged even as expectations grew that a global coordinated rate cut is likely as early as Thursday, and if not then, this weekend. The Fed can only disappoint, it appears. Or perhaps market participants simply feel that lacking a functioning credit channel, rate cuts are now simply a sideshow to the financial crisis. I would not disagree. The Fed can provide infinite amounts of liquidity, but if it does not get into the hands of someone who will spend it, then it is just worthless paper. One argument against a rate cut is that it risks upsetting a very nice little equilibrium the Dollar has shifted into as global deleveraging in the financial sector looks to be forcing a rapid unwind of Dollar based carry trades. The more stable Dollar, and the subsequent downward pressure on commodity prices (with the exception of gold), eases the US inflation outlook, which in turn gives the Fed room to cut rates. The pressure to ease, coupled with pressure to sustain the Dollar, thus argues for a coordinated cut, as 50bp across the board would leave interest rate differentials unchanged. In theory, this would allow the Dollar to hold it ground while delivering the easing that everyone expects and expects to be meaningless (although it provides grist for bond traders). Of course, 50bp is all the Bank of Japan has to give, so it takes something of a leap of faith to see them go along with such a plan. Current Dollar supportive dynamics notwithstanding, the path of monetary policy is placing the Dollar in an increasingly perilous position – if credit channels refuse to loosen, the Fed will be driven inexorably toward policies that attempt to place cash directly in the hands of those that will spend – such as today’s leap into the world of commercial paper. And as the Fed draws more and more risk onto its balance sheet (as well as the US government, via TARP), its credible commitment to price stability will be increasingly in doubt. Will outright monetization soon be the only remaining option if the Fed is under pressure to restore spending power to the US economy? Is outright monetization really off the table at this point? Consider that Bernanke is widely thought to be determined not to make the same mistakes of the Fed of the 1930’s. Consequently, he has pulled out all the stops, cutting rates quickly and lending freely on a wide range of collateral. But the credit crunch continues unabated, as this is not simply a panic, but a massive deleveraging brought about by fundamental insolvency. Recession is now unavoidable, and the length of the downturn grows longer with each day the credit markets are constricted. Short term interest rates are headed toward zero, suggesting a liquidity trap. What options are left? Bernanke must have at the back of his mind the incident that many believe ended the Great Depression – the 1933 devaluation of the Dollar as the US left the gold standard. Certainly outright monetization would bring such an end; and going back to the Great Depression has been a good way to look for Bernanke’s next move. Maybe this is getting ahead of ourselves; maybe not. I think it is important to remember that as we head into next year with a profoundly weakened consumer, the calls to “do something” will be increasingly louder. Actions to date have centered on fixing the financial system; the billions in debt soon to be issued for TARP are not likely to flow into the hands of ultimate demanders. And if credit channels remain broken even after these efforts, near-term options to support growth are limited. Monetization of deficit spending is one such option. Bottom Line: The stage is set for a rate cut; only the timing is at issue. If a rate cut does not come via coordinated fashion by next Monday, it is safe to assume that the Fed intends to move rate policy back to its regularly scheduled meetings. The Fed’s apparent hesitation to cut in the midst of a significant equity sell-off (13% on the Dow in five days) and credit collapse is puzzling given their past behavior. Originally published at The Economist's View and reproduced here with the author's permission. Delicious Digg Facebook reddit Technorati
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Fed Watch: Only the Timing is in Doubt
http://www.rgemonitor.com/us-monitor/253928/fed_watch_only_t...Fed Watch: Only the Timing is in Doubt Delicious Digg Facebook reddit Technorati Mark Thoma | Oct 8, 2008 Only the Timing is in Doubt, by Tim Duy: Yesterday I opined on the Fed’s hesitation to cut rates when such a call should be a slam dunk. Why not step forward with the intermeeting cut? Could possibly the Fed have given up hope on rate cuts, and instead intend to focus on other policy measures? Fed Chairman Ben Bernanke today made clear that given the deterioration in the real economy, a rate cut was on the table: Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate. Moreover, the minutes from the last FOMC meeting indicated that there was already some thought to a rate cut “way back” in September: Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required; however, such a response was not called for at this meeting. Wall Street, however, was unimpressed by confirmation of an imminent rate cut. There appears to be no shock value in such news. Indeed, equity markets plunged even as expectations grew that a global coordinated rate cut is likely as early as Thursday, and if not then, this weekend. The Fed can only disappoint, it appears. Or perhaps market participants simply feel that lacking a functioning credit channel, rate cuts are now simply a sideshow to the financial crisis. I would not disagree. The Fed can provide infinite amounts of liquidity, but if it does not get into the hands of someone who will spend it, then it is just worthless paper. One argument against a rate cut is that it risks upsetting a very nice little equilibrium the Dollar has shifted into as global deleveraging in the financial sector looks to be forcing a rapid unwind of Dollar based carry trades. The more stable Dollar, and the subsequent downward pressure on commodity prices (with the exception of gold), eases the US inflation outlook, which in turn gives the Fed room to cut rates. The pressure to ease, coupled with pressure to sustain the Dollar, thus argues for a coordinated cut, as 50bp across the board would leave interest rate differentials unchanged. In theory, this would allow the Dollar to hold it ground while delivering the easing that everyone expects and expects to be meaningless (although it provides grist for bond traders). Of course, 50bp is all the Bank of Japan has to give, so it takes something of a leap of faith to see them go along with such a plan. Current Dollar supportive dynamics notwithstanding, the path of monetary policy is placing the Dollar in an increasingly perilous position – if credit channels refuse to loosen, the Fed will be driven inexorably toward policies that attempt to place cash directly in the hands of those that will spend – such as today’s leap into the world of commercial paper. And as the Fed draws more and more risk onto its balance sheet (as well as the US government, via TARP), its credible commitment to price stability will be increasingly in doubt. Will outright monetization soon be the only remaining option if the Fed is under pressure to restore spending power to the US economy? Is outright monetization really off the table at this point? Consider that Bernanke is widely thought to be determined not to make the same mistakes of the Fed of the 1930’s. Consequently, he has pulled out all the stops, cutting rates quickly and lending freely on a wide range of collateral. But the credit crunch continues unabated, as this is not simply a panic, but a massive deleveraging brought about by fundamental insolvency. Recession is now unavoidable, and the length of the downturn grows longer with each day the credit markets are constricted. Short term interest rates are headed toward zero, suggesting a liquidity trap. What options are left? Bernanke must have at the back of his mind the incident that many believe ended the Great Depression – the 1933 devaluation of the Dollar as the US left the gold standard. Certainly outright monetization would bring such an end; and going back to the Great Depression has been a good way to look for Bernanke’s next move. Maybe this is getting ahead of ourselves; maybe not. I think it is important to remember that as we head into next year with a profoundly weakened consumer, the calls to “do something” will be increasingly louder. Actions to date have centered on fixing the financial system; the billions in debt soon to be issued for TARP are not likely to flow into the hands of ultimate demanders. And if credit channels remain broken even after these efforts, near-term options to support growth are limited. Monetization of deficit spending is one such option. Bottom Line: The stage is set for a rate cut; only the timing is at issue. If a rate cut does not come via coordinated fashion by next Monday, it is safe to assume that the Fed intends to move rate policy back to its regularly scheduled meetings. The Fed’s apparent hesitation to cut in the midst of a significant equity sell-off (13% on the Dow in five days) and credit collapse is puzzling given their past behavior. Originally published at The Economist's View and reproduced here with the author's permission. Delicious Digg Facebook reddit Technorati
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Fed Watch: Just the Timing Is In Doubt
http://www.investorsparadise.com/fed-watch-just-the-timing-i...Tim Duy submits: On Monday, I opined on the Fed’s hesitation to cut rates when such a call should be a slam dunk. Why not step forward with the intermeeting cut? Could the Fed possibly have given up hope on rate cuts, and instead intend to focus on other policy measures? Fed Chairman Ben Bernanke yesterday made clear that given the deterioration in the real economy, a rate cut was on the table: Complete Story » Fed Watch: Just the Timing Is In Doubt
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Fed Watch: Where Is The Rate Cut?
http://www.rgemonitor.com/us-monitor/253916/fed_watch_where_...Fed Watch: Where Is The Rate Cut? Delicious Digg Facebook reddit Technorati Mark Thoma | Oct 7, 2008 Tim Duy says the Fed may not cut the target interest rate at its next rate setting meeting: Where Is The Rate Cut?, by Tim Duy: On the surface, the case for a rate cut seems obvious. But, despite an extraordinary and historic two weeks on Wall Street, Bernanke & Co. have failed to deliver. And perhaps the lack of action today, a day of panic in global equity markets, is telling us something about policy – don’t look for a rate cut, at least not yet. Maybe we should be listening. If there is one thing the Fed has taught us in the last year, it is that they are inclined to meet periods of financial turbulence with a rate cut. Hence growing expectation for a rate cut, expectations that were only heightened by the string of data that confirmed for almost all remaining doubters that the US economy had slid into recession by at least the third quarter, if not much earlier. Last week’s employment and ISM reports for September appeared to seal the deal on that call. Relatively dovish Fed-speak appeared to confirm these expectations. And if a rate cut was coming, why wait until the end of the month, especially when equity markets needed a boost of confidence? Yet no rate cut emerged. Instead, some Fed speakers have come out against a rate cut, such as St. Louis Fed President James Bullard and Richmond Fed President Jeffrey Lacker. To be sure, perhaps they are simply out of step with the Board. But perhaps the Fed has come to the conclusion that, at least for now, interest rates are not the problem, especially since, relative to the rate of decline in the real economy, the Fed is well ahead of where it would normally be at this point in the cycle. It is arguable that rate cuts have done little to stem the tide of deleveraging that is ravaging the banking system. Indeed, despite a policy path that appears determined not to remake the Fed’s mistake during the 1930’s by taking rates down quickly and flooding the financial markets with liquidity, the crisis continues unabated, as if the more the Fed does, the more financial markets need done. To be sure, perhaps the situation would be worse if not for the Fed’s actions, but those actions failed to produce anything remotely near the quick fix I think was originally envisioned by Fed Chairman Ben Bernanke. Some even think the Fed is making the situation worse via their liquidity provisions, prolonging the lack of interbank lending by providing an escape valve. Why try to reduce counterparty risk when the Fed stands ready to be the riskless partner? The lack of a rate cut at this juncture suggests the Fed is readying a new bag of tricks. They let us sneak a peek at that bag today, using the new powers granted by TARP to pay interest on deposits, thereby setting a lower bound on the Fed Funds rate that should nearly reduce the Fed’s need to sterilize their liquidity provisions via term auction facilities. At the same time, they extended the size of the TAF. These are clear efforts to fix broken credit channels, and this is likely the Fed’s focus, not interest rates. But, as noted above, will an expansion of the existing liquidity provisions, or additional rate cuts, have any impact? Or are they simply more of already failed policies? The Fed is likely preparing for a significant new initiative, consistent with reports that the Fed, with the cooperation of Treasury, is preparing a program to purchase a broader class of assets than simply troubled mortgage backed securities. Outright purchases of commercial paper appears to be on the table – not surprising as the growing credit crunch in this market threatens working capital, the lifeblood of daily commerce. Would outright purchases be inflationary? Here is where the Fed would believe that the ability to pay interest on deposits is important – short term interest rates cannot fall much below the Fed Funds rate, as any excess money would simply flow into reserves at the Fed. The ability to pay deposits should automatically sterilize any excess money creation. This might also explain why the Fed would be hesitant to cut rates at this point; policymakers would want to see if the new system worked as expected before changing policy rates. We are in uncharted territory here, but if excess money created simply flows automatically back into the Fed’s coffers, inflation should not be a concern (assuming that outright purchases are equivalent to term lending). If credit channels suddenly loosen up, then interest rates may prove to be too low and inflationary, but the Fed hopefully, could react quickly by raising the Fed Funds rate and the interest rates they pay depositors. Bottom Line: It is impossible to rule out a rate cut, and it seems like a cut should be the baseline case. Indeed, the case for a rate cut should be a slam dunk, expect for a.) rates are already low and b.) we haven’t seen a rate cut yet. The latter point, especially given the intensity of the crisis over the last two weeks, suggests that looking for a rate cut is simply a case of barking up the wrong tree. It is what we have been conditioned to look for, and hence we are expecting it. But there is nothing like an inconvenient fact to undermine a perfectly good theory. The Fed may simply have already moved well beyond rate cuts in searching for solutions to the current crisis. And outright asset purchases is looking like that next move. Originally published at Economist's View on Oct 7, 2008 and reproduced here with the author's permission. Related RGE Spotlight Issues Assessing Fed Lending Interventions: TARP-II Gives Fed Unlimited Ammo Is a Coordinated Rate Cut Needed at This Point? Need For More Radical Action from the Fed: Can Central Banks Do More to Soothe Markets? Delicious Digg Facebook reddit Technorati
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Fed makes another Star Trek move
http://www.stltoday.com/blogzone/mound-city-money/stl-econom...Does the Federal Reserve listen to Bill Gross? The manager of the world’s largest bond fund posted a commentary yesterday urging the central bank to intervene in the commercial-paper market, and today the Fed obliged. The decision to directly purchase private securities – three-month commercial paper in this case – is the latest in a series of moves that seem designed, to paraphrase the old Star Trek slogan, to boldly go where no central banker has gone before. Is it working? Bloomberg notes that the Fed’s statement was vague in some ways – it doesn’t say when how much the Fed will buy — and that the market’s initial response was mixed: Yields on top-rated overnight U.S. commercial paper dropped 0.74 percentage point today to 2.94 percent, according to data compiled by Bloomberg. Borrowing for seven days increased 1.25 percentage points to 4 percent. Gross, by the way, also urged the Fed to cut overnight interest rates in half, to 1 percent. Tim Duy has some thoughts on why the Fed isn’t responding to that plea.
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