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Fed might keep the rates on hold or only 0.25 cut
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Although 97% of traders say Fed will decrease the rates 0.25 or 0.50 I believe there is a considerable chance that they might keep the rates on hold.Bush-Paulson plan might work without any rate cut.The Fed put a good effort to have a soft landing since 2005.Now if they decrease the rates sharply they risk inflation and soft landing.I expect either 0.25 cut or no cut at all.I think stock market won't rise dramatically this week and I also think there is more downside chance than upward.I don't think the idea of Fed has no choice because the gravity of the situation domestically is clear is incorrect.Fed still has coice to hold the rates although Wall Street lobby push hard.
Before the rate decision , Asian and European stocks fell on Monday, while government bonds rose as investors sought safety after Swiss bank UBS unveiled $10 billion in shock writedowns, raising renewed concerns about the banking sector.
Investors, unnerved by the latest evidence of the damage the U.S. subprime mortgage crisis has brought to the world's financial firms, are focusing on this week's monetary policy decision by the Federal Reserve which is expected to cut interest rates by a quarter point.
UBS, whose charge was one of the largest writedowns by any global bank since the crisis broke, said it had obtained an emergency capital injection from a Singapore government entity and an unnamed Middle East investor.
While the UBS news suggests the banking sector is working towards repairing the subprime damage, uncertainty over further writedowns by other banks spooks investors.
Even if the UBS news shed more light on the subprime mortgage crisis, there will be no relief rally this time.There has been a pause in the slump in banking shares as a lot of negative news have already been priced in, but I don't have the feeling that the bleeding is completely over.
The dollar hit a one-month high of 111.86 yen ahead of an expected U.S. interest rate cut.
The Fed has led some major central banks down the path of easing monetary policy to limit economic damage from the credit crisis, cutting benchmark rates in September and October.
There had been expectations of a half point cut on Tuesday but strong U.S. jobs data on Friday scaled back such speculation.Emerging sovereign spreads tightened 2 basis points while emerging stocks .U.S. light crude fell 0.7 percent to $87.67 a barrel as the dollar firmed. Gold was slightly higher at $798.25 an ounce.
The key to whether the Federal Reserve continues to cut interest rates after this week may hang on the wall behind economist Brian Sack's desk in Washington.
According to Bloomberg news, Sack, head of monetary and financial market analysis at the Fed in 2003 and 2004, uses a chart that plots forward rates measuring investor expectations for inflation in five years. The gauge is so accurate that Sack and his colleagues persuaded the central bank to use it to help set policy. The chart is autographed by former Fed Chairman Alan Greenspan.
Right now, it shows current Fed Chairman Ben S. Bernanke may have less room to lower borrowing costs than investors in Treasuries anticipate, potentially setting bondholders up for a fall. The expected inflation rate, which Sack says replicates what Fed officials use, reached 2.91 percent last week, the highest since 2004, when the central bank began the first of an unprecedented 17 rate increases. The measure was at 2.79 percent on Nov. 1.
Any evidence that accelerating inflation is becoming entrenched may heighten the Fed's debate as policy makers consider cutting rates to keep the worst housing market in 16 years and mounting losses in securities related to subprime mortgages from tipping the economy into recession.
Inflationary Pressures
Futures on the Chicago Board of Trade show a 100 percent chance the Fed will lower its target for the overnight lending rate between banks by at least a quarter-percentage point to 4.25 percent, the third cut since September. The chances are at least 50 percent that the Fed will cut again at its next two meetings, on Jan. 30 and March 18.
The gauge used by Sack, dubbed the five-year five-year forward breakeven inflation rate, suggests bets on lower Fed funds rates may be too bold.The fact that the rate stayed steady for much of the past two months as pessimism about the economy grew bolsters that view.
Fed's `Playbook'
Investors seeking a haven from subprime-related losses have looked past signs of inflation, driving the yield on the benchmark 3 1/8 percent note maturing in November 2009 to 2.79 percent on Dec. 4, the lowest since 2004.
Bonds fell last week as President George W. Bush and Treasury Secretary Henry Paulson unveiled a plan to freeze interest rates on some subprime mortgages to prevent thousands of Americans from facing foreclosure on their homes.
The two-year note yield, which is more sensitive to changes in Fed policy than longer-term securities, rose 9 basis points to 3.1 percent as its price fell 6/32, or $1.88 per $1,000 face amount, to 100 1/32. The yield on the benchmark 10-year note climbed 16 basis points to 4.11 percent. A basis point is 0.01 percentage point.
Today, two-year yields declined to 3.08 percent and 10-year rates fell to 4.07 percent as of 1:27 p.m. in Tokyo.
Not Going Away
Inflation will not go away as an underlying concern for the Fed, and that is one reason we I expect a 25-basis- point cut, rather than 50 basis points.For now, growth takes priority. |
| Tarih
: 10.12.2007 |
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© 2006 Mert TOKER All Rights Reserved. |
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