The Federal Reserve will cut rates soon.

September 11, 2008

If conditions remain as they are now, if unemployment continues to rise, and financial markets remain in their present panicky situation, I’m convinced that we’ll get further rate cuts from the Federal Reserve.

How soon will this be? The timing will not be decided by data or by the central bank itself, but by markets. If the terrible state of the financial markets continues in its present shape, the Federal Reserve will have to act rather soon.

I believe that they will cut a few times before 2008 is over. The dollar rally will then pause for a while. It must be emphasised strongly that the Fed will use all that’s at its disposal in order to prevent an excessive strengthening of the dollar, they are aware that this is dangerous for the US economy. The dollar’s rally’s based on pessimism, and with bouts of relief, it’s likely to go on for another year.

Decreasing inflation will only give them the excuse, but I don’t think inflation will fall as much as expected, on a one-two year basis. But by losing their temper, and confusing  a short term panic with the longer term fundamentals, they will make their job even harder in the longer run. I’m not saying that they shouldn’t cut rates, but I’m unhappy with their dishonesty about inflation.

On another note, according to Bloomberg, The Treasury is considering placing what will remain of Fannie and Freddie in the budget. At the stroke of a pen, five trillion dollars of government debt will be consolidated. I have no comment on this interesting development.

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2 Responses to “The Federal Reserve will cut rates soon.”

  1. […] quite natural to expect the Fed to cut rates tomorrow, and I claimed that this would be the outcome on my post of September 11th. I wrote that the timing would be determined by markets, and a 500 point fall in the Dow, with […]

  2. […] also wrote on September 11th that “I believe that they(FED) will cut a few times before 2008 is over.” And of course, they’re going to zero. But the dollar rally will continue longer than the one […]

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