As the Federal Reserve starts this week's meeting today, the question that the Fed will probably be asking is not whether to cut interest rates again, but just how much of a rate cut they should make in order to help fight off a possible recession.
Last week the Fed announced a surprise 75 basis point rate cut in an attempt to soothe concerns over an American recession, and now the question is, what can we expect this time around? Since the outlook of another rate cut seems to be all but a forgone conclusion, the question becomes, what level rate cut will we see?
After last week's cut, the Fed rate is now sitting at 3.5%, and most analysts are expecting to see that drop by a half percentage point to 3% when the Fed announces it sdecision tomorrow afternoon. Some are even starting to wonder if we could see another 75 basis point drop.
The market has not exactly be shooting to the moon since last week's emergency cut, but the positive impact has been felt in many areas of the market. As Jim Cramer pointed out yesterday, it can be argued that the Fed's magic actually did work.
You have to wonder if another 75 basis point cut would smell a little too desperate. Considering how close we are to last week's cuts, it may be a bit excessive at this time to wish for another rate cut of such proportion. Such big point cuts are rare, and to see another one so soon could be interpreted as a panic move.
At this time, a 50 basis point would probably be the best option for the market's concern. It would bring more confidence into the stock market, but would create a bit less inflationary risk than another 75 basis point cut would pose.
At the time of last week's cut, the Fed made it clear that it was more concerned about stimulating economic growth than it was with inflation. The Fed stated that inflation concerns had subsided enough to justify the emergency rate cuts, but have they subsided enough to justify a 1.5% cut in under 10 days? That is the question that the Fed has to be asking itself at today's meeting, and I have to believe that the outcome is going to be only a 50 basis point this time around.
So who will really benefit from the current interest rate environment? For a great answer to that question, be sure to read Brian White's excellent piece on the answer to that question.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
[photo: tiseb]
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Reader Comments (Page 1 of 1)
1-29-2008 @ 4:11PM
BASILOVECCHIO said...
The Fed should think "out of the box"
They should and I say SHOULD because there is no chance they would---Both increase rates and decrease rates.
WWHAT??? Yes both-decrease and increase.
Decrease rates on a set amount!
Estimate $500 billion @ 2% for the housing crisis.
This money would be lent to lending institutions
for a 15 year period provided-They put an immediate end to FORECLOSURES AND SHORT SALE!
According to the "EVERYBODY WIN"plan this should end the housing crisis.
Raise the discount rate if they deemit nesessary to fight inflation.
cbasilovechio@aol