Inflation background: oil, gold, food (wheat!) soaring. Economic outlook: 2Q GDP revised up to +4%. ISM numbers strong, correlating to roughly +3% 3Q. Trade deficit improving. Jobs picture cloudy--certainly not strong, but latest negative number mostly a cause of unexpected drop in government jobs. Credit market turmoil: better addressed via discount rate action than fed funds target. Announcing a lower target for interbank loans does nothing at all for the current lack of confidence, as evidenced by the LIBOR market. Moral hazard: bailing out people who make stupid trades is a bad idea. Capitalism without creative destruction ain't capitalism. Credibility: the effective overnight rate for August has averaged 5.00. If the target is not cut by at least 25 bps, this undermines the market's confidence in the target number. Other: Doing nothing risks extreme market volatility and a public crucifixion on the Hill. Cutting by 50 bps makes a statement that extreme weakness has manifested... there would have to be better evidence to justify this, and if it were the wrong decision there would be no looking back. They can't cut 50 and then raise sometime later. -- They're cutting 25 bps. It's BY FAR the safest move.
Today's retail sales data were weak, even accounting for a reduction in the cost of gasoline. I now believe there is no chance for a 0 cut next week, and the odds are 80/20 for 25 vs 50. 25 bps remains the *prudent* course of action.
in fact after today it is going to be really difficult to cut 25 - the data vere strong, utilization still high, sales/inventory ratio up, industrial production ok, equity markets higher, paulson talking like we should be hiking, libor down, wtf.... i give you the flat retail sales ex gas but they were high the previous months so mom comp is a bit confusing. let's see the fed wording magic... p.s. oh, and I forgot high consumer sentiment - but that may be revised down in the later reading. p.p.s oh again, and I forgot gold, food, ags, oil, all up. dollar down - paulson saying explicitly today that he wants strong dollar. "*prudent*"? well we will see when we have CPI numbers next week - and those will still not show the full impact of oil around $80.
Paulson says it all the time They face a dilemma now - strong dollar - account deficit will increase weak dollar - the USA will loose access to oil and all other resources as it's getting cheaper for everyone except US There is no solution for this dillema through economic growth.
Always and everywhere, political reality trumps all else. Think about it: if Bernanke doesn't cut rates, and the economy slips (even if that is unlikely), he's completely fucked. If he cuts 25 and it wasn't necessary, it's easily explained away by the data and the clamoring of the street. You don't get to be Fed Chairman by not knowing how to play the game. (Don't get me wrong... if there is no change in the target I am going to be VERY happy... but I think there's no chance now.)
in fact I think exactly the same - 25 is very likely - 50 is a lunacy. we are going to have a compromise between economic reality and wallstreet's obsessive madness.
So, i'm wondering how would these same numbers appear in discounted dollars under the old formula for computing inflation? Could it be that we've completely screwed ourselves by accepting new economic theory that is in fact faulty, and we are going to dig a giant hole because of it?
And if he does, he's a pussy. If he allows himself to be manipulated by public sentiment, he will always and forever be regarded as a puppet. There's just not enough data to support a rate cut right now. Just my two cents.
Too many fed threads too much overanalysis The fed will either: do nothing cut by 25 cut by 50 The most likely is cut 25 no need to do too much thinking why the market will do the thinking for you. Buy now, buy some Dec calls and sit back and rake huge $$