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Bernanke Weighs Recession Risk Against Investor Confidence Risk
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The Federal Reserve will probably cut its benchmark interest rate today for the first time in four years, seeking insurance against a recession. The main question is how big a policy Chairman Ben S. Bernanke is ready to buy.
From my point of view , in economic reality is that there is no need for rate cut.However you need a insurance policy against market collapse.Therefore I see a 25 basis points reduction.
While a quarter-point reduction in the federal funds rate may not be enough to bolster growth and investor confidence, a half-point cut might fan inflation and be perceived as giving in to pressure from Wall Street firms that made bad bets, especially in the market for securities backed by subprime mortgages.
Bernanke and fellow policy makers are really caught. The Fed needs to avoid the perception of bailing out the markets, lenders or borrowers.
The FOMC will opt today for a quarter-point cut to 5 percent in the rate that banks charge each other for overnight loans.Twenty-three of the forecasters projected a half-point move, which traders think is coming sooner or later: Interest-rate futures indicate a rate of 4.5 percent by year-end. The decision is scheduled for about 2:15 p.m. in Washington.
Most-Analyzed Statement
Whatever today's decision, the statement accompanying it may be the most-analyzed in years. Reports portray a weakening economy: The Labor Department said Sept. 7 that that the U.S. last month suffered its first job losses since 2003. Investors will look for hints of further cuts -- such as a pledge to act as needed to safeguard the six-year expansion -- or language that plays down the risk of higher inflation.
The markets will be disappointed by 25 basis points.If they do more now, they may be more cautiously optimistic in the statement. If they do 25 basis points, they will commit to doing more. You can argue it either way for which is the more powerful.
The Fed's decision today will come hours after the government report on August wholesale prices; the Consumer Price Index is released tomorrow. As recently as the last FOMC meeting Aug. 7, officials said inflation was the ``predominant'' risk to the U.S. economy.
Just 10 days later, the Fed acknowledged that ``downside risks to growth have increased appreciably'' and pledged to ``act as needed.'' Policy makers will probably use similar language today.
`A Considerable Amount'
The statement will point to the growth rate as the predominant policy influence and give the market the flexibility to price in a considerable amount of easing.Bernanke, 53, and his team may take additional steps to increase liquidity, including lowering the discount rate --which the fed charges on loans it makes to banks -- or altering terms for collateral used for loans from the central bank.
In their public comments, Fed officials have diverged in their assessments of risks to growth, making today's meeting particularly tough for analysts to handicap.
Since the August jobs report, Fed Governor Frederic Mishkin and San Francisco Fed President Janet Yellen have highlighted threats to consumer spending. By contrast, Fed bank Presidents Richard Fisher in Dallas and Charles Plosser in Philadelphia noted signs of resilience in the economy.
No Cave-In
At the same time, all agree the Fed doesn't want to be seen as caving in to funds that piled into the market for securities linked to subprime mortgages, those made to borrowers with poor or limited credit histories.
As defaults on such loans climbed, investors fled, making it tough for some companies to obtain credit; the market for asset-backed commercial paper shrank the most in at least seven years.
The moral hazard argument is a powerful one. As a result, he predicted, ``the market is wont to be disappointed'' by today's decision. |
| Tarih
: 18.09.2007 |
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© 2006 Mert TOKER All Rights Reserved. |
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