FOMC Preview – Cover to Cut
Today’s Consumer Confidence data may have bolstered the likelihood of a 25bps rate cut tomorrow. Indeed, the read on any of the recent data could cause the FED concern; weaker employment data (via weekly claims) and perhaps an abysmal read on Friday’s Non-Farm Payrolls data. Add to this the fact that Q3 Advance GDP is expected to come in at a 3.1% annualized rate versus 3.8% last time. Now subtract inflationary pressures – which core measures do very neatly – and the FED is covered.
Fed and Tsy have issued ominous warnings about the extent of the housing crisis but have been rather vague about how long it will take to work out or how deep a cut it will make in the economy. The FED is anticipating an extensive housing market downturn but lower rates don’t address this problem – they may however grease the corporate credit market to keep the economy growing (in a trickle down kinda way). Oh yes, keeping the spread to the discount rate is going to continue – so expect a cut there too.
So yes, the FED has cover to cut 25bps. However, it has become increasingly clear the FED is concerned about accusations of “moral hazard” – bailing out Wall Street. Indeed, FED speakers and the TSY Secretary, in retelling the subprime story and how things got out of hand, increasingly mention the notion that the subprime/Wall Street mess is merely an inadvertent beneficiary of lower rates. In short, rates are being cut to address “growth concerns” – which of course come from the first mover, the housing market which was of course set afire by subprime lending.
Is the FED worried about disappointing the markets? Would their “transparency” pledge be compromised if they fail to cut – you betcha. Will the “moral hazard” argument be bolstered? Probably.