All Eyes Will Be Watching Fed Chairman Ben Bernanke
Posted on 03/17/2008 10:45:00 PM PDT by TigerLikesRooster
Fed set for big rate cut amid market turmoil
Tue Mar 18, 2008 12:55am EDT
By Mark Felsenthal and Christian Plumb
WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Reserve is expected to slash interest rates by as much as a whole percentage point at its policy meeting on Tuesday as investors warily await investment bank results that could aggravate fears of a full-blown markets crisis.
Traders expect the Fed to cut rates by a full percentage point in an effort to stop hemorrhaging in financial markets and boost the flagging economy. The Fed is expected to announce its decision around 2:15 p.m. EDT.
The Fed has cut overnight rates by 2.25 percentage points to 3 percent since mid-September as a rise in defaults on subprime mortgages has escalated into a financial crisis that this weekend claimed one of Wall Street's most venerable firms, investment bank Bear Stearns, as a victim.
While financial markets expect the Fed to fire off its biggest rate cut since 1982, they might focus more on the quarterly results due hours earlier from Goldman Sachs Group Inc, the most profitable U.S. investment bank, and Lehman Brothers Holdings Inc, the fourth-largest.
The banks are expected to show how badly they were hit by the credit crunch in the three months ended February 29 -- and any major shocks could send markets into another tailspin, especially given the vulnerability of the financial sector exposed by the fire sale of Bear Stearns to JPMorgan Chase.
The Fed has already taken a series of radical steps in an attempt to stabilize the financial system.
It narrowed the gap between the discount rate -- the rate at which it lends directly to banks -- and the federal funds rate, the overnight rate banks charge each other for loans and the Fed's main policy tool, from three-quarters of a percentage point to a quarter point.
The U.S. central bank also unleashed a barrage of other unorthodox steps to provide liquidity, including $30 billion in financing to enable JPMorgan to buy Bear Stearns. In addition, it set up a new program to provide cash to a wider range of big financial firms through loans at the Fed's discount window.
INFLATION ON BACK BURNER
Against the market upheaval, fears that a seizing up of the financial system could plunge the U.S. economy into deep recession have overtaken worries about inflation fueled by high oil and commodity prices.
"With the recent market turbulence, those inflation concerns are now taking a backseat, and the (Fed) has to think about the action that not only is appropriately aligned with the forecast but that also supports financial markets at a time of extraordinary turbulence and systemic risk," Laurence Meyer, a former fed governor now with forecasting firm Macroeconomic Advisers, said in a note to clients.
The Fed has focused efforts in recent days on surprise steps to make funds available to banks and Wall Street firms, offering hundreds of billions of dollars in auctions and credit to thaw frozen credit markets.
Policy-makers may have hoped that recently announced emergency actions, such as expanded cash auctions for banks and the extension of credit to a wider array of Wall Street firms, would remove the need for a deep interest rate cut. But officials will have to take stock of gloomy data on hiring, factory output and retail sales.
Lehman, whose shares closed down 19 percent on Monday on concern that it is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns, is expected to report its quarterly earnings tumbled 63 percent, according to Reuters Estimates.
Goldman Sachs, which in previous quarters succeeded in escaping the worst of the subprime mortgage crisis thanks to some well-timed short bets on subprime debt, is also expected to have run into tougher times over the past few months.
Goldman, Wall Street's top brokerage by market capitalization, is expected to report earnings fell by more than half from the year-ago quarter.
And if Goldman and Lehman earnings weren't enough drama for one day, the market will have another major event to chew on late in the day: Visa Inc's initial public offering, the largest U.S. stock flotation ever.
(Editing by Leslie Adler)
Ping!
I think the Fed is part of the problem this time around, as is a certain former Fed chairman. They have overreached and panicked markets into a much worse situation than was coming if they had allowed the housing market to crash on its own stupidity. They’ve shot nearly every bolt they have. A 1% cut gives them, I believe, only 2.5% more to work with.
I’m going to trade my dollars in for pesos soon. I need a secure investment.
It would be hilarious if rates were actually raised or left unchanged. I can just see the panic.
Ambulances will be busy hauling collapsed traders from NYSE to hospitals.:-)
This is all just a bunch of political manipulation. They want a 2008 version of “It’s the economy, stupid.”
What’s the word on Asia this morning?
Is it possible to lower rates below zero?
Mixed. Nikkei up, others down, last I checked anyways.
I hope that the chicken littles here yesterday have learned something. People were on here yesterday predicting a four thousand point drop, etc, etc.
What we have here is a mess that’s working its way through the system. To use a crude but probably accurate analogy, lowering the rate by a percentage point is kind of like a laxative for the financial system. It’ll get everything flowing through again, and it’ll blast out what’s been accumulating.
What some of you are missing is that this hitting Bear Stearns and others is, in many ways, a good sign - so long as the Fed manages it correctly. That means that the trouble is working its way through the system. Debt is being repriced.
The Fed acted in exactly the correct way on this one. They stepped in to prevent a panic, but they also didn’t try and stop Bear Stearns from paying the price for its irresposible behaviour.
Most Asian indexes look pretty good, but Chinese ones are down quite a bit (between 4 and 8 percent down on various China indexes).
Don’t post any content from it (prior copyright complaint).
http://www.bloomberg.com/markets/stocks/wei_region3.html
That is, if the current interest rate is 2% and the current inflation rate is 3%, then the interest rate is effectively negative.
I agree with most of what you wrote — though I believe the situation is much more tricky than that. This is not smooth sailing by any means.
/sarcasm
All Eyes Will Be Watching Fed Chairman Ben Bernanke
While it may help the big banks, it will probably not translate into lower rates for consumers, and it certainly will translate into a more quckly falling dollar. The best reaction to this for normal people would be for people to move into an export related job.
Smooth sailing? No. But when is it ever?
Hillariously, the next step is the popping of the oil and gold bubbles. As much as I hate to say it, I’m going to enjoy watching the goldbugs here get what’s coming to them.
Smooth sailing? No. But when is it ever?
1950 to 1973 — a span of time that people oddly and naively believe was “normal.”
They'll all claim to have sold at the top.
yitbos
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