The Federal Reserve Open Market Committee (FOMC) meets tomorrow to decide what to do with interest rates. Based upon speeches by Chairman Ben Bernanke and other Fed officials, it is widely expected that the target Fed Funds Rate will be reduced by 0.25%, with an outside possibility that it will be reduced by 0.50%.
However, the most important outcome from the meeting is the perception that the Federal Reserve is going to stay ahead of the curve to prevent the economy from slipping into a recession. This is the biggest concern of the market. After the last meeting, the statement implying that the Fed was done lowering rates sent the market into a tailspin, despite a 0.25% reduction in the Federal Funds Rate.
The Fed will probably not make the same mistake this time. Here are a few things to look for in the FOMC statement Tuesday:
- Tilting risk in favor of economic deterioration as opposed to inflation. The recent fall in oil prices should give the Fed the opportunity to move away from its balanced risk position.
- An indication that the Fed remains open to reducing the Fed Funds Rate further if economic deterioration continues. It does not need to promise further cuts. It can merely leave open the possibility.
- Indicating a commitment to get the credit system operating again by eliminating or reducing the discount window penalty by lowering the Discount Rate more than the Federal Funds rate. The Fed did this earlier this year, and has discussed making a similar move again.
In certain cases, perception becomes reality. The belief of a supportive Fed can go a long way to reducing the credit crunch even if the action is not taken. The credit crisis will not be solved overnight, and there is no guarantee that the Fed will be able to prevent the economy from falling into a recession. However, the Fed can definitely ease the pain. Under Alan Greenspan, the recessions of the early 1990s and early 2000s were extremely mild compared to others in history.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
12-10-2007 @ 6:58PM
geoff ripps said...
I agree with almost all of your article - the ability of the FED to stay ahead of the curve and, perhaps forestall further deterioration. But I strongly disagree with the "mild recessions" you mention at the end of the article. I believe the early 90's recession was damaging enough to cause George Bush his re-relection. Greenspan was either too late or insufficiently active. The 2000-01 recession was short-circuited not by Mr. Greenspan but by enormous Federal spending following 9/11. Again, Mr. Greenspan was pitifully late. As you may recall, at the December 2000 meeting of the FED he did nothing. He was then forced to reduce rates by half a point in an 'emergency' in early 2001. You may call it mild, but the entire 2nd half of 2000 was replete with CEO's reporting 'no visibility. And, the numbers of people who lost jobs because of this 'mild' recession, certainly would not agree with that characterization.
12-11-2007 @ 1:16PM
Joe Cowan said...
As usual the Fed is bailing out thestupid.
Buying scads of subprime mortgage paper is dumpster diving. Free enterprise includes the right to go broke.