Posted on 03/16/2008 4:32:55 AM PDT by TigerLikesRooster
Calls for 1-point rate reduction grow louder
Bear Stearns shocker triggers forecasts for whopper cut to 2%
By Laura Mandaro, MarketWatch
Last Update: 7:52 PM ET Mar 14, 2008
SAN FRANCISCO (Menafn - MarketWatch) -- Expectations that Federal Reserve next week will cut rates by a full percentage point, to 2%, gained traction among economists and traders Friday after a bailout of Bear Stearns Cos. revealed more fault lines in the U.S. financial system.
Citigroup economists said they anticipate Fed policy-makers will lower the federal funds rate by a point to 2% next week from the current 3%, "and more cannot be ruled out."
"Aggressive action is needed to stabilize the financial setting," according to economists in a research report led by Citi's Robert DiClemente. The decision by the New York Fed and JPMorgan Chase & Co. JPM to provide financing to Bear Stearns BSC "underscores the current fragility of the system."
On Friday, Bear Stearns said that it was forced to draw on short-term financing from the Fed, through J.P. Morgan, after its liquidity "deteriorated significantly" during the past 24 hours. The news sank stocks and pushed investors further into bonds and commodities, which are increasingly seen as a safe haven to market disruptions. See full story.
Credit-market troubles and slowing growth have the potential to unleash the worst U.S. recession in more than 25 years, the Citigroup economists said.
Also feeding into expectations of deeper rate cuts, the Labor Department announced that consumer inflation in February was flat from January, or less than economists were anticipating, though prices gained 4% from the year-ago month. See full story.
Economists in general have been more cautious on the likelihood of rate cuts than the futures market, though they have raised their expectations recently.
Those surveyed by MarketWatch now anticipate the Fed will cut rates by 75 basis points next week, to 2.25%, deeper than the 50-basis point cut they anticipated a week ago.
Since it started cutting rates in September during the first wave of global credit crunch, the central bank has slashed interest rates to 3% from 5.25%. As problems in the subprime-mortgage market spread to other parts of the banking system, creating big write-downs on Wall Street and freezing whole pockets of the credit market, it jumped in with bigger, surprise cuts this year.
Led by Chairman Ben Bernanke, the Fed has used other tools to try to ease the ongoing credit crunch, such as making itself available for $400 billion in bank and broker loans.
The Fed's apparent willingness to loosen the money supply, combined with nearly daily blowups in the financial system, has pushed up the odds on futures that price in the likelihood of rate changes. Traders in this market are now anticipating a 100-basis point cut in March.
The April contract Friday jumped to 97.88, which translates to 100% odds the Fed will lower interest rates by 75 basis points, and more than 50% odds of an additional 25 basis points -- which would bring short-term interest rates to 2%.
On Thursday, federal funds futures priced in 88% odds for just a 75 basis-point cut. Some 42,557 April futures contracts, which market participants use as a snapshot of expectations on the March meeting, traded hands on the Chicago Board of Trade.
One basis point is 1/100th of a percent.
Deutsche Bank economist Joseph LaVorgna said Friday that his bank now believes the Fed will cut rates by 75 basis points on Tuesday, "and the odds of a 100 basis cut are growing."
"There has been no letup in financial market deterioration," he wrote in a research report. "Whether the Fed opts for an unprecedented 100 basis-point move will depend largely on financial-market conditions, namely whether the market further raises the probability of systemic solvency issues."
Ping!
Want to see $120/barrel oil? Cut interest rates some more.
Our monetary policy at this moment in time is a disaster.
One can see it reflected in the price of everything from gas, to milk, to bread.
Note to Bernahke: STOP CRASHING THE DOLLAR!!!!!
Bernahke = Bernanke
A drop of 100 basis points will be seen as a sign of PANIC in the global currency markets, driving MORE investors into the speculative Oil Futures and Hedge Funds markets, driving the cost of energy up even MORE.
I’m wondering if the spare change (inflated dollars) being dumped by the gummint to ‘help the economy’ isn’t going directly into futures / commodities markets, thereby exacerbating the problem. We’re from your government, and we’re here to help ......
I’m in 100% agreement with your observation. It looks as if the Fed is doing everything it possibly can to weaken the dollar.
The more the dollar crashes in value the less house prices will fall in terms of dollars. The less the numbers fall the less losses for the banks, again in terms of dollars. The less the banks lose the less the fed has to bail them out directly.
So it looks like to me they are doing it on purpose.
The fed is spreading the losses to everyone who holds dollars (or assets that are in dollars) and away from the banks by devaluing the dollar. Everyone’s savings are devalued. The federal governments debt is now less even though the numbers are huge, each dollar owed is worth substantially less so it take less actual wealth to pay it back.
We as a nation have become poorer. But that’s what happens when you borrow more than you can pay back...
Just my 2 cents...
I have to agree that this makes little sense, in that things just continue to spiral around the bowl faster and faster.
I may be wrong, (and I’m sure one of my friends here will correct me if I am) but all I have seen to date are actions that just push the resolution of this problem further away, and in fact are making things worse.
The problem before us are tens of thousands of bad loans that should never have been made in the first place, and now that these institutions are feeling the heat, the Government is stepping in to loan them more money at cheaper rates?? How does that do anything to fix the root problems??
The Congress is out there looking at ways to keep some of these irresponsible borrowers in homes they never could afford, with mortgages that should never have been made in the first place.
Remember this boys and girls: all of this started back in the late seventies when the Congress decided that everyone “deserved” to own a house. Back then only about 30% of people owned their homes, and we peaked recently in the low 90% range. This current crisis is largely just the latest symptom of that decision.
In order to increase home ownership, the Congress has legislated away many of the financial safeguards that made this problem possible in the first place. Even 10 years ago, it was inconceivable that anyone could borrow more than their home was worth, or get a mortgage with zero down payment, or make interest only payments on a mortgage, and the concept of a 50 or more year mortgage was unheard of...yet all of those things (and more) are what have driven us to where we are today.
I’m of a mind now that we are probably on the cusp of another collapse of World Financial Markets over this. There’s no easy fix for an EU Investor-owned Derivative Instrument that consists of large numbers of $500,000 loans on homes that are worth $150,000, and are in foreclosure or default. Someone is going to lose on that deal, and it’s the greedy dumbasses who bought those instruments on the promise of a fast buck who are left holding the empty bag. There just isn’t any good way to fix that without serious financial repercussions on a global scale.
A 1% rate cut by the Fed just illustrates the panic the Fed is in and reduces future options for further rate cuts. Oh, and it fuels inflation. The “best” of all worlds is in the offing. Carter style stagflation.
We need confidence in the system and investors to buy these products, that will drop rates to the end users.
Cheap money is going to have an effect somewhere, and commodities are rising at a faster rate than the dollar has declined, so it seems more than likely to me. I've read comments that suggest raising margin requirements would knock quite a bit of the speculation out, to the tune of -$15/bbl or more.
“The more the dollar crashes in value the less house prices will fall in terms of dollars. The less the numbers fall the less losses for the banks, again in terms of dollars. The less the banks lose the less the fed has to bail them out directly.”
Disclaimer:I’m not an economist but I play one on my pc.
I agree with your comment above 100%. Bernanke is picking the lesser of two evils. He’s picking inflation in an attempt to prop up housing values and avoid a financial meltdown at the expense of consumers at the gas pump and grocery store. He appears to be in an unenviable position.
That’s the first good idea I’ve heard in a LONG time about the current state of affairs!
agreed
The types of investments that the hedge funds can get into needs some oversight too.
Locally, one has bought high-end vacant land (estate ranchettes) with the expectation of turning them quickly for big bucks.
This is great for me. My ADJUSTABLE RATE MORTGAGE will go down to about 3% if this happens. ROCK & ROLL baby!!!
Since they are just printing money why bother to charge interest. Just give it way to qualifying groups. - tom
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