Saturday, October 27, 2007

Fed futures remain rather cloudy

I'll continue to hold off from offering any more forecasts of Federal Reserve interest rate action until it becomes more clear what principles and criteria the Fed is being guided by. Before the middle of August everything was clear, but now the Fed has headed off into uncharted territory and left us with no guidance as to how they will respond to developments in the real economy and financial markets.

I will continue to predict that six months from now (March or April) the Fed will be defending itself against accusations that it overreated in August and September. Although pumping liquidity into the financial system was the right thing to do, the lowering of the discount rate back in August was simply not necessary and merely exacerbated the panic mentality.

The good news is that the Fed does now have the leeway to leave rates unchanged this month. The Fed may cut again if it feels that confidence in the economic outlook is at risk, but the real economy (outside of housing) has been holding up reasonably well over the past month.

A lot of people are betting on a quarter-point cut at the FOMC meeting on Wednesday, but another half-point cut is a possibility as well. To me, holding rates would be the sensible thing to do, but few would blame the Fed for going with a quarter-point cut.

-- Jack Krupansky

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