Will the Fed cut rates by a half-point real soon?

Fed funds futures indicate that speculators are 100% convinced that the Federal Reserve will cut its target rate by a half-point real soon. Such short-term fed funds futures are usually not wrong, but I think the Fed wants to give the bank bailout and other approaches it is using a little time before cutting rates again. Ultimately, the twelve regional Federal Reserve Bank presidents do listen intently to what their local and regional contacts tell them, so the banks will let the Fed know when a rate cut is what they need, regardless of what the stock market or bond traders and speculators might think.

In short, there is plenty of market sentiment for a half-point rate cut, but it is not clear that the banks are clamoring for it at this time. They need big piles of cash right now, not just a lower rate on smaller piles of cash.

Also, just today the Fed is holding an auction for $150 billion of 85-day credit. Banks will pay more for it than even the current fed funds target rate (on 9/22 the auction rate was 3.75%), but it is a lot of hard cash that the banks directly need rather than simply funds for interbank lending. The 9/22 auction was for only $75 billion and a 28-day term and there were $133 billion in bidders.

-- Jack Krupansky