Fed is likely to cut rates again on October 31st …

[Hyperion]

...and continue to add to potential future problems

Everything points to another rate cut by the Federal Reserve on October 31st. The debate may be if there will be a cut of 25 basis points or 50 basis points. The majority expect a 25 bass point rate-cut.

The problems as outlined in the previous three-part series will only be elevated by another rate-cut.

First of all it will give the dollar the final push off the cliff. Many argue that it has been priced into the forex market but the rate-cut has also been priced in the equity markets and there is likely to be another strong rally on Wednesday after the announcement which gives reason to believe that the U.S. dollar is very likely to continue to fall against a basket of global currencies.

The Fed may continue to bail-out those investors that have not recognized the problems in the housing and credit markets but by the same token take a very dangerously stance for the U.S. economy as a whole.

Commodity prices will continue to rise and fuel inflationary expectations as input prices will continue to remain at elevated levels and are likely to push higher which will either cut into corporate earnings or fuel a jump in inflation as those companies will try to pass at least part of those costs on to consumers.

The problems and the impact of those problems which the Fed currently tries to save the economy from have been caused by an extended period of low interest rates to begin with and now as the problems are evident the Fed seems to take a position which will accelerate those problems into the early part of next year.

Any potential positive short-term boost to the economy by the Fed rate-cuts will be offset by increased long-term problems which the U.S. economy is likely to face.

Consumers, which already face a heavy debt load, may now be encouraged to continue to borrow more money to fuel the economy (one reason why a fed-cut is cheered by many investors) and continue to add to the credit problems whose impact on the overall economy the Fed tries to minimize.

The first rate-cut was not necessary and the second one may end up in economic homicide for the U.S. economy going into next year.

Inflation indicators should be expected to rise in future months and input-prices will continue to face upward-pressure. The Philadelphia Fed Survey is just the latest example for that.

The labor-market remains tight and the potential of wage-based inflation is another aspect which should not be ignored.

In a desperate attempt, by a Fed chief which is not qualified to keep the post he currently occupies, to save the economy from a potential recession next year the Bernanke led Fed seems to do the opposite and sacrifices the long-term stability of the U.S. economy for short-term aid to individuals and institutions which did not see the recent problems in the housing market as well as the credit markets.

Exports have benefited from the ongoing deterioration of the U.S. dollar but given the spending patterns of U.S. customers and the aggressive rate-cut last month along with the likely cut on Wednesday has the potential to increase the trade deficit which will add to problems for the economy as a whole.

Given the strong devaluation of the U.S. dollar the U.S. economy as part of the global economy is by no means as strong a figures suggest as the spending power has extremely deteriorated. This is one fact that many analysts and economists seem to ignore during their overall assessment of the economic strength of the U.S. economy.

The Fed is widely expected to lower rates by 25 basis points on Halloween but if for some reason the Bernanke Fed takes a deeper look at the current situation and the strong potential for problems their most recent short-term decision may have and decides to keep rates on hold to assess more data in coming weeks then investors should prepare for a sharp pull-back in global equity markets despite the employment data released on Friday.

Overall, the expected rate-cut is not 100% guaranteed and investors around the globe will closely await the rate decision on October 31st while the majority hopes to cheer a rate cut and the minority hopes for a smart long-tem economic decision.

The Fed’s mandate is to ensure long-term price stability and create an environment which encourages continued expansion in economic activity. There will and there need to be periods of recessed growth and contraction and any attempt to delay such an economic event will only increase and elevate such an unavoidable impact on the economy.

The Fed should have left rates on hold last month and they should do the same this month. It may have resulted in a mild recession and the potential for a quicker recovery. The approach the Fed chose is very dangerous for the U.S. economy and could elevate all economic problems next year which will require a longer time to correct once the economy is faced with the full impact of those problems which in a long-term view of the U.S. economy will be a clear negative.

It is not a smart economic approach to count on strong foreign economic growth as the primary factor for growth in the U.S. economy. The U.S. has long underperformed other mature economies as measured by equity market returns and given the deterioration of the U.S. spending power in a global economy due to the free fall of the U.S. dollar the returns are even less encouraging.

[Grizzums]

Originally Posted by Hyperion

...and continue to add to potential future problems

Everything points to another rate cut by the Federal Reserve on October 31st. The debate may be if there will be a cut of 25 basis points or 50 basis points. The majority expect a 25 bass point rate-cut.

The problems as outlined in the previous three-part series will only be elevated by another rate-cut.

First of all it will give the dollar the final push off the cliff. Many argue that it has been priced into the forex market but the rate-cut has also been priced in the equity markets and there is likely to be another strong rally on Wednesday after the announcement which gives reason to believe that the U.S. dollar is very likely to continue to fall against a basket of global currencies.

The Fed may continue to bail-out those investors that have not recognized the problems in the housing and credit markets but by the same token take a very dangerously stance for the U.S. economy as a whole.

Commodity prices will continue to rise and fuel inflationary expectations as input prices will continue to remain at elevated levels and are likely to push higher which will either cut into corporate earnings or fuel a jump in inflation as those companies will try to pass at least part of those costs on to consumers.

The problems and the impact of those problems which the Fed currently tries to save the economy from have been caused by an extended period of low interest rates to begin with and now as the problems are evident the Fed seems to take a position which will accelerate those problems into the early part of next year.

Any potential positive short-term boost to the economy by the Fed rate-cuts will be offset by increased long-term problems which the U.S. economy is likely to face.

Consumers, which already face a heavy debt load, may now be encouraged to continue to borrow more money to fuel the economy (one reason why a fed-cut is cheered by many investors) and continue to add to the credit problems whose impact on the overall economy the Fed tries to minimize.

The first rate-cut was not necessary and the second one may end up in economic homicide for the U.S. economy going into next year.

Inflation indicators should be expected to rise in future months and input-prices will continue to face upward-pressure. The Philadelphia Fed Survey is just the latest example for that.

The labor-market remains tight and the potential of wage-based inflation is another aspect which should not be ignored.

In a desperate attempt, by a Fed chief which is not qualified to keep the post he currently occupies, to save the economy from a potential recession next year the Bernanke led Fed seems to do the opposite and sacrifices the long-term stability of the U.S. economy for short-term aid to individuals and institutions which did not see the recent problems in the housing market as well as the credit markets.

Exports have benefited from the ongoing deterioration of the U.S. dollar but given the spending patterns of U.S. customers and the aggressive rate-cut last month along with the likely cut on Wednesday has the potential to increase the trade deficit which will add to problems for the economy as a whole.

Given the strong devaluation of the U.S. dollar the U.S. economy as part of the global economy is by no means as strong a figures suggest as the spending power has extremely deteriorated. This is one fact that many analysts and economists seem to ignore during their overall assessment of the economic strength of the U.S. economy.

The Fed is widely expected to lower rates by 25 basis points on Halloween but if for some reason the Bernanke Fed takes a deeper look at the current situation and the strong potential for problems their most recent short-term decision may have and decides to keep rates on hold to assess more data in coming weeks then investors should prepare for a sharp pull-back in global equity markets despite the employment data released on Friday.

Overall, the expected rate-cut is not 100% guaranteed and investors around the globe will closely await the rate decision on October 31st while the majority hopes to cheer a rate cut and the minority hopes for a smart long-tem economic decision.

The Fed’s mandate is to ensure long-term price stability and create an environment which encourages continued expansion in economic activity. There will and there need to be periods of recessed growth and contraction and any attempt to delay such an economic event will only increase and elevate such an unavoidable impact on the economy.

The Fed should have left rates on hold last month and they should do the same this month. It may have resulted in a mild recession and the potential for a quicker recovery. The approach the Fed chose is very dangerous for the U.S. economy and could elevate all economic problems next year which will require a longer time to correct once the economy is faced with the full impact of those problems which in a long-term view of the U.S. economy will be a clear negative.

It is not a smart economic approach to count on strong foreign economic growth as the primary factor for growth in the U.S. economy. The U.S. has long underperformed other mature economies as measured by equity market returns and given the deterioration of the U.S. spending power in a global economy due to the free fall of the U.S. dollar the returns are even less encouraging.

I enjoy reading your opinions. I am a student.

I have a couple questions for you....

(1st highlight) What do you use to guide your assumptions that a rate cut has already been priced into the equities markets? I do see where the futures markets are "expecting" a cut but how do you determine that equities markets have already priced it in, especially in light of recent major market index movements?
http://www.clevelandfed.org/research...unds/Index.cfm
http://stockcharts.com/def/servlet/F...md=show&disp=e


(2nd highlight) I do not see how a rate cut is going to "encourage" more borrowing by the type of consumer that is a "100% consumption consumer", the type of consumers that really drive the US economy...? I do not see an increase in money flow resulting in much "loosening" of the latest credit tightening that has at least in part, begun. <--- Which I am happy with.
I do see it helping bigger institutions and lg banks but I don't see that really trickling down much to the consumer that I mentioned. High end consumers will spend whether or not there is an economic downturn/ "softening" but imo the 100% consumption consumer is not going to feel "rich" enough to spend more on credit. Nor do I see credit being extended out there at the unhealthy and irresponsible rate that it has been for the past several years.....maybe this is wishful thinking on my part. I do not see a rate cut resulting in significant equity borrowing or the like as I do not see the housing problem at a bottom yet....nor do I think energy prices are going to significantly recede any time soon. I think a cut may allow some more consumers with those poisoned ARM's to refinance into a fixed, but not a big spend on credit via equity surge. With energy eating more into the 100% consumption consumers pocketbooks, that will continue to leave less in their pockets to spend elsewhere.....and if those folks do not "feel" wealthier via their homes, then spending (from the type that really drives US economic growth) will not surge as a result of another cut.


(3rd highlight)

What makes you think wage based inflation here in the US shouldn't be ignored...? Not that I think it ever should be, but is your assumption that it is being ignored? Do you see wages here in the US really inflating any time soon...? Would a cut again increase pressure here? Could you help me out more with you're line of thinking....from what I have seen, ULC has been fairly benign. If I am thinking correctly, ULC is derived from total comp divided by real output, correct? I am just trying to get my hands around this...

btw - I was not for a rate cut last time, nor this time....but I'm just a wee little pee on.

[Hyperion]

The equity markets have moved higher in recent sessions and the only or the major factor cited by many industry professional was cited as the hope for a rate-cut.

Excluding this anticipation of a rate-cut and even the potential of another 50 basis points which some hope for and believe will be the outcome of the FOMC meeting, in my opinion, there is no reason why this market has been pushed higher as of recent.

After the most recent single-day drop on 10/19 many argued it is a great buying opportunity and since the Fed is anticipated to cut again many believe that the majority of problems will disappear and that the economy already has made it through the worst part of recent turmoil.

The only reason that most investors have pushed the market higher since then is the anticipation of the rate-cut which is the reason why I believe it has already been priced into the equity markets. That was the only aspect which lended support to the equity markets during the past few trading days.

I would not be surprised at all to see either one of the below two scenarios after the announcement tomorrow:

1. Buy on the rumor sell on the news - Investors buy the anticipated rate-cut now and once the cut is delivered we may see a sell-off as the next question woud be: What now? We have bought the market due to this rate-cut but what's next?

2. The Fed may, and this is just a very tiny possibility, keep rates on hold and stick to their mandate of long-term price stability and focus on the long-term impact rather then to satisfy any short-term expectations. The Fed used to dislike to be predictable as it has become under Bernanke. If they keep rates on hold we will see a rather heavy sell-off, in my opinion.

The rate-cut will encourage more borrowing as that is what it is designed for but it will take some time for any rate adjustment to work its waythrough the economic pipeline. Usually it take between 9 and 15 months for the effect to be felt. Consumer will continue to borrow as due to the rate-cuts there will be smaller interest and institutions know how to 'convince' the majority to borrow more debt and fuel the economy.

It is very poor financial eduction which re****s in poor financial intelligence and extremely bad spending habbits by the majority of consumer which have led to the credit crisis. That and very low interest rates for a an extended period of time are the main reason why we face this heavy debt problem, the credit crisis (which may not be over yet but the Fed managed to delay further problems into early next year with their rate-cuts) as well as the houding market melt-down (which is far from over). By the same token it has fueled the equity-markets but it has done so on a very unstable base.

I doubt that 'irresponsible' lending will recede anytime soon and I really doubt spending behaviour will change. Consumer wil definately feel an impact by high energy costs but regardless they majority will spend over the limit and continue to borrow to the max.

Low interest rates have driven that spending pattern in the past the recent rate-cut with the anticipation of further rate-cuts may increase that poor spending pattern among many consumers.

Consumer spending may not surge as a result but given the fact that consumer already have more debt then they should have any small increase could have a rather drastic negative impact on those consumers which will also have a negative impact on the economy.

High net-worth consumers will spend regardless of the economic situation, I agree.

Another huge problem is that so many home-owners refer to their home as an investment and fail to recognize that a home is the biggest wealth-illusion to the middle-class.

I beleive as long as the labor market remains in decent condition and the unempmployment rate hold below 5% consumer will not addapt their spending pattern. They may spend less but they will continue to borrow and spend. I think it's a reason for concern.

The potential of wage-basedinflation is largely ignored as it is minimal, regardless the pressures are in the pipeline. I don't think it wages will inflate soon but I doubt that enough attention is put on that subject.

The tight labor market forces wages higher in certain professions and put upward pressure on wages. I don't think it is necessarily bad to have higher wages but the threat for wage-based inflation, also small at the moment, exists and I believe that if you wait until the problem 'jumps-into-your-face' it is too late to tackle it and the impact will be felt by the econmy.

Right now, the problem and the threat is minimal but I also think the attention of the potetial problem is minimal as well.

Overall, the last aggressive rate-cut and the potential of a repeat, maybe to a smaller extend, will only increase and delay the problems currently in the economic pipeline, at least in my opinion.

Investors and apparently the Fed have chosen to ignore the impact of the short-term problem fixing which is cheered and hoped for by the majority.

[Grizzums]

The equity markets have moved higher in recent sessions and the only or the major factor cited by many industry professional was cited as the hope for a rate-cut.
I personally attribute more to the reason the market has done a little bounce back over the past week than just *rate cut chatter* - I see that the market was at a nice support level for a technical bounce coupled with some strong positive news coming from the Tech sector
leaders like AAPL, T, EMC, VMW, MSFT, GOOG, RIMM) to ignite the current bounce... Ill agree that rate cut anticipation was also a factor to a certain extent, but I'd look more towards the financial/commoditiy sector's action to see how much is priced in - http://stockcharts.com/h-sc/ui?s=$CRX&p=D&yr=0&mn=6&dy=0&id=p52380254797&a=104 104670
http://stockcharts.com/h-sc/ui?s=xlf...d=p52380254797

Sept 18th was the last cut

Excluding this anticipation of a rate-cut and even the potential of another 50 basis points which some hope for and believe will be the outcome of the FOMC meeting, in my opinion, there is no reason why this market has been pushed higher as of recent.

My opinion being that good news from Tech Sector coupled with an area for a technical bounce along with some expectations for an upcoming rate cut were all contributing factors

After the most recent single-day drop on 10/19 many argued it is a great buying opportunity and since the Fed is anticipated to cut again many believe that the majority of problems will disappear and that the economy already has made it through the worst part of recent turmoil.

I think that kind of rosy outlook is not at all realistic, but probably fits the mentality for short term traders and trading programs that feast on volatility in the markets

The only reason that most investors have pushed the market higher since then is the anticipation of the rate-cut which is the reason why I believe it has already been priced into the equity markets. That was the only aspect which lended support to the equity markets during the past few trading days.

As I mentioned, I do not entirely agree with that theory.^^

I would not be surprised at all to see either one of the below two scenarios after the announcement tomorrow:

1. Buy on the rumor sell on the news - Investors buy the anticipated rate-cut now and once the cut is delivered we may see a sell-off as the next question woud be: What now? We have bought the market due to this rate-cut but what's next?

^^ I think this is a reasonable scenario as I see anything short of 50 basis points now to be psychologically disappointing to those looking for more relief. Remember 50 basis points in Sept was a bit of a surprise in order to ignite the subsequent rally. I think a qtr will be a psychological disappointment and met with less enthusisam by the herd and still raise questions about the real health of the economy.... the fact that the FED feels the need to cut rates again......what message does this send throughout the country? That our market/ economy is still in trouble....imo

2. The Fed may, and this is just a very tiny possibility, keep rates on hold and stick to their mandate of long-term price stability and focus on the long-term impact rather then to satisfy any short-term expectations. The Fed used to dislike to be predictable as it has become under Bernanke. If they keep rates on hold we will see a rather heavy sell-off, in my opinion.
I am hoping for this outcome, but like you.....HIGHLY doubt it

The rate-cut will encourage more borrowing as that is what it is designed for but it will take some time for any rate adjustment to work its way through the economic pipeline. Usually it take between 9 and 15 months for the effect to be felt. Consumer will continue to borrow as due to the rate-cuts there will be smaller interest and institutions know how to 'convince' the majority to borrow more debt and fuel the economy.

It is very poor financial eduction which re****s in poor financial intelligence and extremely bad spending habbits by the majority of consumer which have led to the credit crisis. That and very low interest rates for a an extended period of time are the main reason why we face this heavy debt problem, the credit crisis (which may not be over yet but the Fed managed to delay further problems into early next year with their rate-cuts) as well as the houding market melt-down (which is far from over). By the same token it has fueled the equity-markets but it has done so on a very unstable base. Pretty much in solid agreement here

I doubt that 'irresponsible' lending will recede anytime soon and I really doubt spending behaviour will change. Consumer wil definately feel an impact by high energy costs but regardless they majority will spend over the limit and continue to borrow to the max. I also doubt that 'irresponsible lending' will be curtailed to much of a degree....it may have done more so, if the FED hadn't decided to bail out the financial sector on our backs (the taxpayer). I would like to think that spending habits by the consumer will be curtailed as it has to a certain extent when looking at some of the middle income consumer's retailers....target excluded. Then again amex, capital one and other consumer credit cards said they don't see a big change in consumer spending habits but do say they have seen more deliquencies that may change some credit offerings, but likely would just cause the companies to raise the interest rates to consumers rather than tighten the pool of eligibility for consumers.

Low interest rates have driven that spending pattern in the past the recent rate-cut with the anticipation of further rate-cuts may increase that poor spending pattern among many consumers.
Hard to argue that....I just think that as middle income consumers see their homes as being less of a cash cow, that may be enough of an incentive to curb some spending when coupling in energy prices taking more out of the pocketbooks.....again, could be some logical yet ignorant wishful thinking on my part

Consumer spending may not surge as a result but given the fact that consumer already have more debt then they should have any small increase could have a rather drastic negative impact on those consumers which will also have a negative impact on the economy. In agreement here

High net-worth consumers will spend regardless of the economic situation, I agree.

Another huge problem is that so many home-owners refer to their home as an investment and fail to recognize that a home is the biggest wealth-illusion to the middle-class.

^^To a certain extent, Id agree, but Im not completely sure your meaning. I have done well with real estate and probably fall right in line with the group termed "middle class"....I guess here, again, a difference might be how responsible/irresponsible and realistic the consumer is.

I beleive as long as the labor market remains in decent condition and the unempmployment rate hold below 5% consumer will not addapt their spending pattern. They may spend less but they will continue to borrow and spend. I think it's a reason for concern. Definitely cause for concern.

The potential of wage-basedi nflation is largely ignored as it is minimal, regardless the pressures are in the pipeline. I don't think it wages will inflate soon but I doubt that enough attention is put on that subject.

The tight labor market forces wages higher in certain professions and put upward pressure on wages. I don't think it is necessarily bad to have higher wages but the threat for wage-based inflation, also small at the moment, exists and I believe that if you wait until the problem 'jumps-into-your-face' it is too late to tackle it and the impact will be felt by the econmy. Thats true, and typically a rate cut and subsequent temp shift in the agg demand curve before returning to equilbrium with full employment GDP (now twice) is certainly a recipe for the possibility of wage inflation pressures to begin or further mount, correct?

I know one sector that won't be seeing much wage inflation in the near term.....financials. Numbers could continue to get worse imo and I am noticing a lot lot of executive scapegoats falling by the way side.

Right now, the problem and the threat is minimal but I also think the attention of the potetial problem is minimal as well.

Overall, the last aggressive rate-cut and the potential of a repeat, maybe to a smaller extend, will only increase and delay the problems currently in the economic pipeline, at least in my opinion.

Investors and apparently the Fed have chosen to ignore the impact of the short-term problem fixing which is cheered and hoped for by the majority.

I agree.

Rate Cut will probably cause me to take some more similar action in port allocation....commodities will certainly have more fuel to add to their fire. Do you forex folks see a rate cut taking the dollar down more, or can the dollar be near a bottom yet, already pricing in a cut....if thats the case, the dollar could have a little rally if the fed stands pat eh? lol...doubt it.

[Grimgrak]

Do you guys know what time the fed cut announcment will be at?

[Ciao]

hello
Compliment for both of you because IMO I think you both got some good points… and nice manners

I would like to give my thought but it is too complicate for me to keep up with you (English wise) so in order not to “clutter/spoil” this thread I prefer not to answer…..

Keep up this type of posts because IMO are the foundation of trading

[Ciao]

Originally Posted by Grimgrak

Do you guys know what time the fed cut announcment will be at?

Gg
I believe FOMC decision at 2:15 p.m. ET

[Hyperion]

Yes, the FOMC anouncement is at 2:15 pm ET.

[Hyperion]

Grizzums,

I agree that some of the tech heavyweights did contribute to the recent upward move as well.

The NASDAQ outperformed the Dow and the S&P in the past few weeks on the back of strong earnings by some of the companies that you have mentioned.

But did they not move higher in anticipation of good earnings and guidance? Personally, I think that many of those companies should be neutral at best.

In regards to 'your-home-as-an-investment', I referred to individual homeowners referring to their home as their biggest asset or their biggest investment as a cause of many problems. If you invest in real estate, well then of course it is an investment and many do a good job at real estate investments.

I agreee that the financial sector may experience some rough times and that they have not made it through any crisis yet. Most of the write-downs will be split over several quarters which means that they are very likely to feel the impact for quite some time.

As you said, commodities, especially if the Fed decides to possibly commit economic homicide or at least set-up one (hey it's halloween, could the Fed pick a better day to stab the economy in the back and push the dollar of the cliff?), will remain strong.

If the Fed cuts, which is very likely even though we don't hope so, I doubt that the dollar is near a bottom yet and will continue to deteriorate which will force commodity prices even higher while at the same time continue to decrease the spending power and the value of U.S. dollar-denominated assets.

In a few hours we will know what Bernanke and his Fed will do...

[Grizzums]

Well certainly forward looking forcasts and guidance from growth companies is not a surprise. Now whether or not "guidance" should be part of financials at all is debatable....I'd prefer co's not play the guidance game at all.

I wonder if that surprise GDP number will get the fed thinking twice today....especially with numbers showing a 3% rise in consumer spending...???