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Friday, 4 January 2008

Be Prepared - A Note From The Collection Agency

A happy New Year to one and all.

I want to send you a quick note with a warning of possible Federal Reserve action with regard to Federal Fund Rates.

Today saw an openly acknowledged meeting of the Presidents Working Group on Financial Markets and a follow on meeting with Pres Bush, attended by Mr Bernanke. Although the wires presented it as this:

"White House has confirmed Fed Chairman Ben Bernanke will be in the 1pm ET meeting update to Pres. Bush from the Working Grp. on Fincl. Mkts; that meeting is not about discussing possible stimulus programs." (my emphasis)

With the likes of Goldman Sachs being quoted as follows:

"US ECON: It's official, Goldman says they expect a 50bps rate cut by the fed AT or BEFORE the Jan 30 FOMC. But, they say an intermeeting cut would "probably require a major downside surprise in consumer spending within the next ten days." (MNI)

I believe the Fed may cut rates as early as Monday, before the markets open. They will probably cut by 0.25% with a further 0.25% at the scheduled Fed meeting.

These are dangerous times, the quickening pace of the slowdown in the economy is a surprise to the Fed et al. Ensure your strategy is adjusted accordingly.

1 comment:

Collection Agency said...

Maybe the markets (and me?) are in for a surprise?

GLADWYNE, PENNSYLVANIA (Thomson Financial) - The head of the Philly Fed, Charles Plosser, today raised the possibility of a stagflation threat to the US economy.

"Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation," the Philadelphia Federal Reserve Bank president warned in a speech here.

"Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand."

Plosser, who has a vote on the rate-setting Federal Open Market Committee this year, warned that he is getting increasingly worried about inflation.

"Recent data suggest that inflation is becoming more broad-based," he said, "And recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures."

Plosser also used today's speech to draw a clear line between what the Fed should do to stabilize the economy and what it should do to stabilize financial markets.

He believes the Fed's three rate cuts will take time to work through the economy and that in the meantime growth will slow.

"Since monetary policy's effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008."

In the meantime, "we will get some bad economic numbers from various sectors of the economy in the coming months," he added.

But beyond the immediate short term, Plosser was more optimistic. He reckons the economy will "improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects."

On the credit market front, the Fed's new Term Auction Facility (TAF) program should help stabilize financial markets and provide liquidity when the interbank lending markets "are under stress and not functioning smoothly," he added.

Plosser said early evidence suggests the first two 20 bln usd auctions were successful. Two more have been scheduled later this month.

The key point, he said, is that "the TAF did not change the stance of monetary policy. The Fed actually withdrew funds through open market operations as it injected term liquidity through the TAF."

Plosser was already known as one of the inflation "hawks" among the regional Fed bank presidents. His analysis confirms a preference for avoiding further rate cuts and the risk of further inflation as long as financial markets problems do not pose a danger to the rest of the economy.