I agree that the Fed might not need to cut rates like everyone thinks, mainly because a rate cut really doesn’t solve the real issue here.

The lack of credit market liquidity has to do with investors no longer willing to take on risk at the prices we have been used to. Lowering Fed Funds won’t change this.

It might help to bail out some home buyers, but defaults and foreclosures are less of an issue than the credit market freezing up, even though the former are on the rise and I’m not saying that is a non-issue. I’d just be way more concerned about good firms not having access to liquidity for a long period of time. It will pass at some point, but the short term could get ugly if we see this for several more months.

Today’s jobs report gives the Fed more ammunition to cut, although monthly variations can be all over the place, so I would not read too much into it yet. It seems like the Fed has a history of giving in with rate cuts, and it may do the same this time around, but I think such action would have more psychological purpose than economic purpose given the current issues in the marketplace.

I took a look at the CIA’s website and found the United States fiscal year starts and ends 1 October – 30 September.

So, it’s almost given that the Feds are going to cut at a minimum of half a point! There seems to have historically always been a bailout. Plus, economy seems to be slowing, even Walmart reduced it’s earnings. So, continual liquity injections are not going to cut it, rates need to mist downward. We are experiences aftershocks from the 1% fed fund rates not too long ago and the super lax issuance of credit.

The magician always has a trick up his sleeve. Let’s wait and watch the magic trick!

Manoj Patel

PS: Alan Greenspan’s book comes out on the 17th of this month. I’m going to try and preorder a copy and suggest that you do also.

The way I see it is that Aug 17 is when they cut the discount rate and they extended the lending term to 30 days which falls to about Sep 17. Sep 18 is FED meeting where they will probably assess if this discount window is working and whether the injection of liquidity is working.

If it is, why cut rates. Also, the FED the treasury together with Fannie Mae are engineering some something (I don’t want to call it a bailout) in the background that will indirectly inject liquidity into the market.

If they don’t cut, market will sell off and will probably test the lows set in August

What you think, Chad? I’m not even considering FED Funds futures because as you said it’s overly optimistic

John

JJ: A futures contract will have an expiration date and a quote associated with it. So, let’s say September Fed Funds are trading at 5.00%. That implies that the market expects Fed Funds rates to be at that level at the expiration date. You simply compare the current Fed Funds rate (5.25%) to the futures quotes to see what the market is pricing in.

I think that your analysis on this is fair overall- that the stock market is really expecting at least 25bps of cuts at the September meeting and probably a little more- the fed funds market is not a very sound way to estimate the probabilities of a cut at this point.
The reason is that the fed is currently being overly generous with the financing and liquidity being added to the overnight market. This is causing Fed Funds (which the fend funds futures fix off- the fed fund futures fix at the arethmetic avereage of the daily fed funds rate)to fix much lower than the traget rate. So much so in fact that August fed funds settled at an implied 5.022 rate. That would seem to indicate that th e fed cut rates in August. This is not the case as we know but that it added significant amount of liquidity to the system. The september fed funds you mention have a similar scaling factor in them.

Like i said the conclusion is fine but the causation may be a bit shakey