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."
Likelihood of 100 basis-point rate cut gaining a following (Fed rate cut)...
it should be cut 200% or 300% ....
everyone should just go to loews or home depot to buy wheel barrows to cart the money around like germany in the 30’s!!!!
What didn't a big bad wolf from a fairy tale figure it out before? So brilliant.:-)
Somebody let me know when rates reach 1%. I want to borrow one million dollars from the FED. I can service the debt at $10,000 a year for 40 years and still be able to waste the remaining $600,000 with impunity on wine, women and song. Or McMansions, Plasma TVs, and SUVs Either way, I should be dead in 40 years I think.
I love it when a plan comes together! I just want to get in on the action of borrowing masses of money you know you can never repay and leave the taxpayers holding the bag. It’s my turn and I DESERVE IT!
We are about to see $120 a barrel at the current Fed funds rate. $140 a barrel anyone?
You mean slashing rates 125bp in one week wasn't a sign of panic?
Such is the nature of “fiat money”....throughout history ...fiat money always goes to -0-...NO EXCEPTIONS..
Greenspan understood it way back in ‘66 http://www.321gold.com/fed/greenspan/1966.html before he got political and Keynesian religion
The liquidity from the new recent easy money is going everywhere but where it is needed. Where do you think people are getting the money to bid oil up to $100 a barrel? Same for food and metals. They are the next bubble and BurnYankees chopper cash is fueling them. He may figure that out when the Fed funds rate gets to 0% and banks still refuse to lend to each other from fear, distrust and losses.
6 months ago “palmer” said BurnYankee would inflate like hell, and that is exactly what BurnYankee is doing...
LOL
First off, if you live in Michigan your housing value is way down and your house most likely will not appraise for the same amount it did a few years ago. So you may not be able to get a loan for that will cover the amount of your original adjustable rate mortgage.
Also, mortgage rates are not going down as the fed fund’s rate falls because lender are seeing much greater risk.
Get ready for your new mortgage to cost you.
The more the dollar crashes in value the less house prices will fall in terms of dollars.
Could you expand on that correlation, because for the life of me, I can’t see it. If today’s dollar was worth a penny tomorrow, how would that affect the cost or benefit of any assets within the USA? Imports would cost 100 times more, but your income and outflow would all be relatively the same. A $100,000 income would have $1,000 value but your $500,000 mortgage would have a value of $5,000. No difference. You’ve totally lost me...
I can see how a crashing dollar and high inflation shrinks the national debt over time. But how does that stop the fall in house prices in time to end this liquidity crisis?
“This is great for me. My ADJUSTABLE RATE MORTGAGE will go down to about 3% if this happens. ROCK & ROLL baby!!!”
Fed Efforts Foiled By Banks as Mortgage Rates Rise
The interest rate on a 30- year fixed-rate mortgage has climbed to 6.37 percent from 5.5 percent since Jan. 24, according to the Mortgage Bankers Association. The U.S. Federal Reserve has cut interest rates five times since September.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMaXTX_3tq9w&refer=worldwide
They want to push down the dollar. That’s they only way our government will be able to meet its debt obligations. We will pay them back with worthless dollars. The Germans did the same thing in the 1930’s.
If I see a steady move in the stock markets from like 1:45 to 2:20 or so, I’ll be betting big that it reverses at 2:30 when they make their announcement.
FWIW, the sudden ubiquity of “we’re near at least a short-term bottom” (I’ve seen at least three completely different articles in the past three days) leads me to believe that we’ll be moving up to the Tuesday announcement.
That’s exactly the problem. The credit default spreads are sky high, and it is a confidence thing. The Bear Stearns thing was a run on the bank. Lower interest rates won’t necessaril help that. It just needs to work itself through the system.
I’m going out on a limb and saying that the Fed will cut by ONE HUNDRED AND TWENTY FIVE BASIS POINTS on Tuesday.
If anybody wants to see my reasoning, tonight I’ll either look for the graph I saw that made the case or gin it up by hand.
I thought it was a disaster back when the yield curve was inverted.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.