Sunday, September 09, 2007

Bloomberg's John Berry: Fed May Cut to 5 Percent Without Promising More

Bloomberg columnist John Berry is a veteran Fed watcher, previously with the Washington Post, who is one of the most respected authorities on interpreting the words and actions of the Fed. His latest weekly column is entitled "Fed May Cut to 5 Percent Without Promising More" which argues that the Fed may cut the Fed funds target rate by a single quarter-point at their upcoming meeting, but is very unlikely to follow that with any additional cuts.

His title superficially makes it sound as if he agrees that a quarter-point cut is likely, but once you read through his column you can sense that the emphasis is on the word "May." Even his lead paragraph starts out hedged by "If":

If Federal Reserve officials cut their 5.25 percent target for the overnight lending rate when they meet on Sept. 18, it will be by only a quarter-percentage point with no promise of more to come.

He is also confirming that he does not concur with the almost universal outlook on Wall Street that a string of at least three rate cuts is slam dunk baked in the cake.

He also pours cold water on the Wall Street demands for both an inter-meeting cut and a larger half-point cut at the upcoming FOMC meeting:

Officials have already disappointed many market participants by refusing to cut the target in response to turmoil in financial markets. And they will surely disappoint those hoping for a half-point cut at the next meeting of the Federal Open Market Committee.

Although he is open to the possibility of a Fed rate cut at the upcoming FOMC meeting, his phrasing betrays his skepticism:

While the Fed might decide on a rate reduction as a bit of insurance against having growth weaken too much, there's no sign of serious problems in the economy outside of housing.

(My highlighting.)

I would agree that it is possible that the Fed could go for an "insurance" cut, but I would also strongly suggest that this Fed under Bernanke doesn't imagine for one moment that a quarter-point of "insurance" is an enticing strategy in the current scenario.

He emphasizes that the Fed really does believe that the economy has enough strength to survive the current market turmoil without the need for lower interest rates:

New information can still influence the meeting's outcome because the impact of the financial market dislocations on the economy remains so uncertain. But right now there's no worry among Fed officials that the economy is about to fall out of bed, or that some major financial institution is going belly up.

(My highlighting.)

After summarizing the latest Fed Beige Book, he concludes that:

None of that suggests there is any emergency that requires an immediate Fed response.

He does lean towards the possibility that given the uncertainty of the economic outlook going forward, the Fed might want a little insurance:

So what the FOMC does on Sept. 18 probably comes down to a matter of risk management. If the data and the anecdotes continue to depict a pretty healthy economy, the unusual degree of uncertainty about the outlook might lead officials to decide the best decision is a 25 basis point cut just in case the impact of the financial turmoil turns out to be greater than they expect.

I do not concur that the Fed would seek comfort in a "just in case" cut, but Mr. Berry is alerting us to one possible scenario rather than insisting that it is a slam dunk.

I would also note that I haven't heard any Fed officials taking a "just in case" or "insurance cut" stance in recent speeches. My personal belief is that this Fed under Bernanke will opt to focus on substantive and meaningful and necessary actions that affect the real health of the real economy rather than focusing on appearances and trying to make Wall Street traders and and commentators "feel good."

-- Jack Krupansky

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