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Is the Fed going to Save the Day, or is it too Late?
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: September 11th, 2007 at 3:09 pm EST
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The final shoe probably dropped Friday for the rate cut crowd. The employment report came in with a weak 4K job loss for the month of August, with a measly average of 44K for the last quarter. Not much of a surprise here as the economy starts bracing for a chilly winter. The question now is will Bernanke and Co. do what it takes to head off a recession. To be certain, the jobs report is pointing in that direction. On the bright side, the report may also provide some relief on the inflation front…as a loosening in employment eases pressure on wage increases. Combined with recent reports of declining inflation (pce, cpi, ppi and a host of others along with falling home prices), the Fed has all the evidence it needs to re-charge the economy.
The striking irony is that the economy is not in horrible shape, corporate profits are strong and balance sheets are in plenty good standing. But most know that risk is high for falling growth or a possible recession in future quarters without some stimulus. It’s not as if business will come to a halt…that’s not even a question, rather…will it slow enough to cause a major slump into 2008. Some rate cuts and further liquidity injections may allow the Fed to step in front of a problem before it shows its ugly side. Rate moves take 6-8 months to seep through the economy…and with this kind of headstart a few rate cuts may be just what the doctor ordered.
The housing and mortgage issue is just at the tip of the iceberg. In other words, it’ll get worse before it gets better. Countrywide just announced plans for a massive layoff, while others in the industry are likely to do the same. Can the Fed afford to wait until it sees more and more mass layoffs before they get a clue? Housing stocks have slumped to prices not seen in five years or more. They are already in a recession, and take away their growth and you are basically left with the consumer, government and exports. With the uncertainty over the consumer, that combo is hardly a threat to growth.
What is the Fed likely to do? Further, how can the Fed really make an impact? At their September meeting, it is likely a .25bp cut is in the cards, and possible a .50bp move. That’s the only question right now. The uncertainty over yea or nay likely gone. What markets hate is uncertainty, but with volatility…the market likes unexpected surprises (note, the big move up on aug 17 and Aug 31). But with the veil clearly removed, the question becomes how much. This is where the Fed can make a major impact, by not erring on the side of caution…and being aggressive, knowing the can cut without spurring much inflation. After all, the evidence is there.
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Bob Lang, Economics
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