
Over the past few days it seems the financial markets have been pricing in that the Federal Reserve will certainly cute interest rates by at least a quarter point in its next monetary policy meeting in September. In fact, the federal funds futures are now pricing in over a 100% chance of the Fed cutting rates in September. Futures traders have even priced in a 47% chance the Fed will cut the Federal Funds rate to 4.5% by its December meeting. ![]()
I personally believe that cutting the Fed Funds rate by a quarter of a point in September would be a smart move, but I simply don't understand why everyone all at once thinks its a foregone conclusion now. In my opinion the Federal Reserve's moves have made it clear that they want to try to do everything to avoid cutting the Fed Funds rate.
The Federal Reserves recent moves to cut the discount rate and increase liquidity in the credit markets could be a sign that the board wishes to stay away from cutting rates. Just today Jeffrey Lacker commented on the credit crisis and basically downplayed the chances of a rate cut.
If conditions stay terrible in the credit markets and more major lending companies go belly up, the Federal Reserve may well move to cut rates in September. The problem now is, if they don't, the financial markets could be jolted in a big way to the downside.







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