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Grim Fed Chairman makes rate cut seem inevitable
(Agencies)
Updated: 2008-10-08 11:32 CHICAGO - A sobering economic assessment from Federal Reserve Chairman Ben Bernanke on Tuesday was widely seen as laying the groundwork for a deep cut in US interest rates, possibly before the Fed's end-of-month meeting.
Given a mix of recent weak economic data and a worsening outlook for growth, the Fed "will need to consider whether the current stance of policy remains appropriate," Bernanke told the National Association for Business Economics. The comments electrified short-term interest rate futures markets, where dealers piled on new bets that the Fed will cut its benchmark lending rate to 1.25 percent this month from the current 2 percent.
Shortly later, minutes from the mid-September Federal Open Market Committee meeting revealed that a faction of Fed policy-makers had been almost -- but not quite -- ready to push for a rate cut then, before financial markets lurched lower again. Rate futures now show a 44 percent chance for a three-quarters of a percentage point rate cut this month, and talk continued that the Fed, either alone or with other central banks, might move before its October 28-29 scheduled policy-setting meeting. Futures earlier on Tuesday had initially erased prospects for a 75 basis point rate cut this month after the Fed announced plans to buy commercial paper, the short-term debt that many companies use to fund their day-to-day operations. "The cut could occur as a coordinated move with the European Central Bank and other central banks," said Asha Bangalore, economist at Northern Trust in Chicago. Like Bernanke, the minutes of the Fed's September 16 meeting offered a cautionary message on how the credit market strains that have led to an unprecedented government effort to bail out the financial sector were bleeding into the broader economy. "Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required," the minutes said. With three weeks to go before the two-day FOMC gathering, US stock markets have been in freefall.
The Standard & Poor's 500 Index .SPX has racked up its biggest five-day point loss on record and the biggest percentage decline since 1987, down a whopping 14.6 percent over the five trading days ended on Tuesday. Speaking in Texas on Monday, Chicago Federal Reserve Bank President Charles Evans declined to say what, specifically, might force the FOMC to lower rates below the current 2 percent level. But Evans indicated he would be cutting his growth forecast for next year, and that official Fed forecasts would go the same way. "It's difficult to see that the first-half 2009 outlook will be better than we thought," he said. Minneapolis Fed President Gary Stern did not address the rate outlook in a speech in Chicago on Tuesday, but the policy hawk conceded the inflation outlook has improved on the back of rising joblessness. Stern, the central bank's longest-serving regional bank head, termed the current financial crisis "unprecedented ... in my long career at the Fed." Certainly, some policy-makers are likely to argue against the need for a change to the federal funds rate. In an interview with Reuters on Monday, St. Louis Fed President James Bullard said a rate cut was not "the right tool" for now because of the market's extreme volatility. Dealers suspect the Bernanke faction will win the day. "We now see a 50 basis point intermeeting cut as very likely, followed by an additional 25 basis point at the October 28-29 FOMC meeting," said Michael Hanson, economist at Barclays Capital. |
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