The Fed will cut rates this Tuesday (9/18) and here's why...

O

oc-conservative_IHB

New member
<p>With the Fed decision coming this Tuesday at 11:30am, I thought I would summarize very succinctly my thoughts on why I believe the Fed will cut the Fed Funds Rate by 25 or 50 basis points.</p>

<p>First I don't believe the Fed acts on conspiracy theories or overly complex theories. And I don't believe the Fed doesn't act because they don't want something to happen (ie. not cutting because they don't want a falling dollar). I tend to believe in simple explanations, sort of like Occam's Razor if you will.</p>

<p>So, my primary and I think most obvious points of why the Fed will cut:</p>

<p>1) The Fed has effectively already lowered the FFR, and banks have already been borrowing at up to 50 bp below the target rate through open market operations.</p>

<p><img alt="" src="http://i225.photobucket.com/albums/dd17/oc-conservative/FFR.gif" /></p>

<p>2) Bernanke has been setting up for a rate cut given certain conditions (ie. "contained" inflation, weak employment data, worsening housing market...). I believe enough of the conditions will give reason for the Fed to cut.</p>

<p>3) Bernanke cut the Discount Rate in order to restore confidence in the credit markets. It's obvious the housing market needs the same psychological boost in confidence via the FFR . If demand doesn't pick up, pretty soon mosquitos will take over the inland valleys.</p>

<p>I think this is what the Fed will do, not what I would like them to do. I would love for the Fed to stand pat or even raise rates because I don't believe in the bullshit headline or core inflation of 2%. What I see with my own eyes is more like 5-10% annual inflation given energy, health care, rent costs. </p>

<p>And most of all I believe they should let the housing market correct fully on its own without interference, which may or may not even help. But, then again, the Fed orchestrated this housing bubble. Why wouldn't they also try everything in their power to have their cake and eat it, too.</p>

<p>I haven't yet contributed to the IHB fund, so let's make this fun. If I'm right and the Fed cuts, I will donate $100 to the IHB fund. If I'm wrong, and the Fed does not cut, then I will donate $250.</p>
 
The futures market is pricing a 25 point cut at 37% and a 50 point cut at 55%, which means the futures market is putting 92% on at least a 25 point cut.
 
You may be correct. I think they are foolish to do so because fighting inflation is supposed to be one of their primary functions, and a rate cut will cause inflation. It does appear to be a consensus opinion that the rate cut will happen.





You don't need to donate to the IHB fund. I enjoy the debate, that is payment enough.
 
<p>>>>You don't need to donate to the IHB fund. I enjoy the debate, that is payment enough. <<<</p>

<p>I've been meaning to but haven't yet, so it's all good. I thought now would be a good time. </p>

<p>Besides, I've learned alot here which will serve me well in the future, and I enjoy this unique community to boot!</p>
 
<p>Fed text:<em></em></p>

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

<p>Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."</p>
 
<p>SHORT THE DOW ASAP!!!!!!!!!!!</p>

<p>This is your typical market mania taking over. Soon the markets will realize that this is an indicator of how uncertain our economic future really is. In addition to this, the horrid housing numbers come out next week.</p>

<p>It is my sincere belief that the DOW finishes below 13k for the month of September.</p>
 
Lendingmaestro...there's plenty of time for that...no point in getting in front of a freight train. Best to be a little late than too early
 
<p>IR - you were clearly wrong on your rate cut assessment. I'm not bashing nor do I care that you were wrong. </p>

<p>What I'm curious of is does this change any aspect of your housing outlook? If you were wrong in your predictions of the Fed, might you want to re-evaluate parts of your housing analysis?</p>

<p> </p>
 
<p>I think this news amounts to nothing more than a fart into a gale force wind. Nothing IMO will alter the course of IR's predictions other than a complete return to the availability of easy 2006 money.</p>

<p>That's not happening. Even if the GSE's raise the limits to 625k, they aren't significantly loosening guidelines.</p>
 
Cutting rates is going to do nothing about bringing back products such as Alt/A and Subprime loans. The cut is going to only help those institutions right now that have "pier loans" out there that they cannot find buyers for...ie Chrysler / Cerrebus, KKR / First Data and so on.





The secondary markets are still going to be stagnant, retail banking is going to underwrite more of their own loans since they are going to have to carry them on their books, and hedge funds are still leveraged out their buttholes so as more and more of their assets do not perform they will either have to sell them or they will become insolvent. To little to late by the FED just trying to save Wall St that is all.





For us we will be paying 3.50 for a gallon of gas, 7 bucks for an extra value meal, and in california we will soon run out of water because it hasn't rained in yrs...just kidding on the last one but I would like a little drizzle every now and then.
 
lm - If you serious about using the fed cut rally to short, then wait. Don't try and catch a falling knife? Well, you know what I mean. Wait for the downtrend. Shorting during a rally is painful.
 
<em>"What I'm curious of is does this change any aspect of your housing outlook? If you were wrong in your predictions of the Fed, might you want to re-evaluate parts of your housing analysis?"</em>





lendingmaestro said it for me. It isn't about the interest rate as much as it is about the loan programs and guidelines. If investors start buying loans given to subprime borrowers with negative amortization and 1% teaser rates, then current housing prices can be supported.





If you go back to the post <a title="Permanent Link to Your Buyer?s Loan Terms" rel="bookmark" href="http://www.irvinehousingblog.com/2007/05/07/your-buyers-loan-terms/">Your Buyer’s Loan Terms </a>and <a title="Permanent Link to The Anatomy of a Credit Bubble" rel="bookmark" href="http://www.irvinehousingblog.com/2007/05/14/the-anatomy-of-a-credit-bubble/">The Anatomy of a Credit Bubble,</a> you can see the impact of lower or higher interest rates.
 
<em>"IR - you were clearly wrong on your rate cut assessment."</em>





My crystal ball must be hazy with respect to FED actions...





This cut really has me wondering what data they are looking at that causes them this much concern. Everyone was talking about how strong the economy is and how housing isn't hurting the economy, etc. Why the sudden and drastic change?
 
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