The Federal Reserve cut interest rates by 25bp today, causing US stocks and carry trades to plummet and the dollar to strengthen significantly. For the traders who were hoping for a larger 50bp rate cut and a strong stock market rally, Bernanke may be the Grinch that stole Christmas. Minutes before the interest rate decision, stocks rallied indicating that more traders were adjusting their positions for the possibility of a larger rate cut. Unfortunately, not only did the Fed fail to cut interest rates by 50bp, but they also only lowered the discount rate by the same amount (25bp). The statement reeked on caution as the Fed acknowledged the slowdown in economic growth, the intensification of the housing market correction and the softening of business and consumer spending. They still feel that inflation could rise, but the upside risks to inflation no longer balance the downside risks to growth. This has caused Rosengren to vote in favor of a 50bp rate cut. Last month’s decision was also not unanimous, but at that time, Hoenig voted in favor of leaving interest rates unchanged. The probability of a recession is at the highest level in more than 3 years according to the latest WSJ.com survey. No problems were solved with today’s quarter point rate cut and that is why fed fund futures are pricing in more easing in 2008. The dollar could rally for the remainder of the week, but we expect weakness to resume as we get closer to the end of the year because the Fed won’t be able to avoid looser monetary policy. Pimco’s Bill Gross is calling for 3 percent interest rates, which means that he expects another 125bp of easing. Wholesale inventories fell to the lowest level ever in relation to sales in the month of October. The trade balance and import prices are due for release tomorrow. We expect both numbers to be stronger as the weak dollar boosts import prices and exports.
Read more:Is Bernanke the Grinch Who Stole Christmas?
No comments:
Post a Comment