There will be no Fed rate cut

Will the Fed cut rates next week?

  • Yes they will cut

    Votes: 148 59.7%

  • No they won't cut

    Votes: 100 40.3%
  • Total voters
    248
Quote from basis:

@Trefoil:

I can agree with some of what you've said. Earnings next week are certainly more important for the equities picture in the short term than the Fed announcement. In fact, if you're right and LEH is ok, and there's a selloff after a 25 bps announcement, it'll be a great short-term buy op.

But PPI is also that morning, and CPI is the next day. What if Bernanke did nothing, and said explicitly he wants to get some more data, namely CPI and the rest of the reports? If he needs to, he can cut a week later. I don't really disagree with you, but I think the world is WAY too convinced that the Fed has to operate the same way it did under Greenspan. Same goes for where the TY is. Who knows, maybe Bernanke will actually let the market be wrong sometimes.
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Problem w/Bernanke not moving is this:

Productivity is my leading indicator; I did an intensive study of it a few years ago and figured out that it leads unemployment by about two years.
It started dropping at the beginning of '06. At that time, I thought to myself that '08 was going to be a difficult year economically, and that Bernanke was setting up for a major rate-cutting campaign that year.
So far, everything is happening as I thought, not in the particulars, of course, but in general: holding the FF over the prevailing yield curve had the usual effect of constricting credit, which is showing up in this instance as the subprime debacle. Employment is beginning to suffer. By next year, Bernanke will be in major rate-cutting mode.
Recall that Trichet came out with a special press conference after the August meeting of the ECB to clearly state he'd be raising rates regardless, and was forced to backtrack, something which made him look utterly stupid.
BOE head Mervyn King, just this past week, was forced to come off his high horse and rescue Northern Rock.
Over in Japan, the BOJ was forced to backtrack on raising rates when it became clear the Japanese economy would not be able to support it.
The only CB head who hasn't been made to look like a fool so far is Bernanke. I don't think he wants to put himself in the same embarrassing position as the others. If he does try to fight the markets, he will be made to look like a fool and will be forced to cut regardless. Reality beats macho fantasy every time.
 
http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

sound bite:


Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
 
Quote from dhpar:

well, it is becoming a bit boring but for the last time and in a layman words.


Fed and Wall Street relationship is kind of similar to a relationship of a dad and his little son. The son needs to listen every day to an evening story - otherwise he is very scared and cries all night long.
One day the son is very naughty. Dad tells him to be nicer or he will not tell him the regular evening story. The son is still naughty. The evening comes and the son becomes afraid that he is not going to hear his evening story - he starts to be nice for the last few minutes of the day and apologizes to his dad in the bed "I will never do it again".
What is the dad going to do?
A. He will not tell him a story because they discussed the implication of his behavior several times during the day. But that implies cry in the house for the whole night - something the dad has to consider ;)
B. He will tell him the story after a proper explanation of the situation and after giving him a "hard time"
C. He will tell him 2 stories

Well I think the pattern is starting to be clear here. A and B is a possibility here, C is just ridiculous. The most efficient is clearly A - after all every dad wants to have his son to play by the rules even in adverse circumstances (I can tell). B is possible - he is the dad after all.

Now some people will say "ok fair enough but the story addresses only moral hazard and not the economic conditions that fed should deal with". That's true but if fed should face only economic considerations it should more likely to raise than cut. The current economic situation was not much more bullish in the past 30 years than it is now: employment low, inflation not low, real rates extremely low, fed funds minus inflation the lowest in the past 30 years, equities at high, oil high, metals high, ags high, dollar low, wealth high, global economy in great shape, libor going down etc etc.

Then there are some smarties that say - fair enough with moral hazard, fair enough with current economy but what about economy in the future? omg
These people often comes from the research departments of big banks (like Hatzius, Rosenberg etc) which are clearly the less intelligent of the crowd. They predict 100bps cuts basically continuously and in harder times they become overnight stars. People have short memory - they do not remember that these and the same predictors predicted 100bps cut within the next 3-6 month about a year ago as well. Rosenberg does it for many years now. On top of that everybody knows how screwed up these research teams are (e.g. equity/sector recommendations from Merrill for the past few months). GS changing rate outlook in May/June after loading up with hundred thousands of short IR futures (the outlook which is by the way reversed back already)
The point of above is why we should believe these analyst at all. They have no clue and on top of that they calls are often morally questionable.

So to summarize it for the last time from me on ET:
A. or B. it is. I prefer no cut especially as the recent panic seems to recede. They could maybe secure it with 25 cut in the discount rate. 25 ff is ok - still I think fed will dents its reputation much more than if the dad in the story goes with B.
who argues for fifty has clearly no clue - 50ers please give us a single valid reason why the cut should be 50. To decrease reserve requirement is even more stupid - do you understand implication of that Dr. Greenback? Do you know what is an effect of that? And why/when this should be done?
No Chinese cuts either. 12.5 is pointless while 37.5 looks like bowing to ff futures expectations - which, by the way, do not reflect real probability of meeting outcomes for many many reasons.

For the full disclosure: I have positions that benefit from no cut, 25bps cut and even 50bps cut (e.g. homebuilders, investment banks). In fact I have most of stuff in commodities - and they will definitely benefit from 50 disproportionately more. Therefore I am not talking my book here - I just lay what I think is a good course of action.
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who is the dad who is the son? who spanks who?
 
Of course there are no guarantees, but normally when the second wave down exceeds the last pivot point you will get a full 100% retracement. It may take awhile, but it normally gets there. Now if it comes back and exceeds the previous pivot, then all bets are off.
 

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Quote from xflat2186:

Did anyone see Kudlow calling for "shock and awe" and a huge fed funds rate cut and further discount rate cut ? LOL
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Laughing MAO through the whole show. "Shock and awe." What a tool.

lol
 
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