Wall Street Banking on Rate Cut From Fed

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August 16, 2007 by   - () Leave a Comment

Faced with tightening credit markets and tumbling stocks, Wall Street is clamoring for the Federal Reserve to cut interest rates, but so far there is no indication that the central bank will oblige.
But, according to CBS MarketWatch, many economists are starting to pencil in a rate cut at the Fed’s Oct. 31 meeting. They say it will be clear by then that the economy – and not only foolish investors – would benefit.
“I do expect them to ease, but September may be too early,” said Mickey Levy, chief economist at Bank of America. “I think (a rate cut) is contingent on the economy. The Fed will ease only if these events result in a marked deterioration in economic performance.”
The Fed has three meetings left this year: Sept. 18, Oct. 30-31 and Dec. 11. Economists said the chances of an inter-meeting move remain very low.
The Fed flooded the financial markets with cash last week, but that was just a temporary loan that’s already been paid back. A rate cut in the overnight federal funds rate would go further by adding cash into the markets on a permanent basis, thus restoring both confidence and liquidity to markets, some economists and strategists say.
Financial markets are betting that Fed chairman Ben Bernanke and his committee will cut rates, and soon. Fed funds futures are pricing in a 100% chance of a cut in September, with a small chance of a cut coming before the meeting. The market expects the fed funds rate, now at 5.25%, to sink to 4.75% by year end.
This could put pressure on the central bank to move sooner, some economists said.
“By pricing with such confidence the chances of a rate cut, the markets are essentially forcing the Fed’s hand,” said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., in an e-mail. “The Fed can follow the markets, a preferred approach when the economy has experienced inflation pressures.”

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