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To: Broken_Clock who wrote (362718)	3/17/2008 6:52:44 PM
From: Giordano Bruno	Read Replies (1) \| Respond to of 436258

1 point it is. Fed Calls: Can Markets Swallow Smaller Rate Cut? Fed callsForecasts for the Federal Reserve’s policy meeting changed following the central bank’s Sunday night move to expand its direct lending reach and lower the discount rate. Futures markets are now fully pricing in a one percentage point cut in the federal funds rate to 2%, and this morning are putting small odds on a 1.25 percentage point cut by the end of this month. At times last week, traders priced in the possibility of a three-quarter-point cut, but half a point was the only sure bet. The severity of the financial crisis, and concern the Fed has shown with its recent dramatic moves, is leading many forecasters to raise their calls to a one percentage point cut. Since the Fed started announcing policy changes in 1994, it has never moved a full percentage point at a single meeting. Even a 0.75 percentage point move would be rare: In November 1994, the Fed raised rates by that much to 5.5%, and this January the Fed made its surprise three-quarter-point cut to 3.5% before lowering half a percentage point more a week later. (The Fed did cut the discount rate by a full percentage point in December 1991, though the change in the federal funds target was half that, according to the Federal Reserve Bank of New York.) What would lead to a smaller cut of 0.75 percentage point? Some Federal Open Market Committee members remain particularly concerned about the effects of the steep rate cuts on inflation expectations. The 2.25 percentage points of cuts since September — including 1.25 points in January — are contributing to the dollar’s decline, while rising commodity prices are threatening to raise inflation in the coming months. Many policy makers have argued that today’s crisis is most severe in credit markets rather than the overall economy, reinforcing the view that the Fed should target its action to the problems at hand. Forecasters remain divided on what the Fed will do. # Macroeconomic Advisers says the outcome “remains somewhat contentious and uncertain” but concerns about inflation and the dollar will take a back seat. “The FOMC has to think about the action that not only is appropriately aligned with the forecast but that also supports financial markets at a time of extraordinary turbulence and systemic risk,” says Larry Meyer, the firm’s vice chairman and a former Fed governor. “Now the task is to ease enough to reinforce the liquidity steps taken last week and yesterday, which requires not disappointing the market’s expectations.” # Goldman Sachs economists said a one percentage point cut “would be a clear sign that Fed officials see urgency in the current situation and a need to bolster confidence, both in the financial markets and in the public at large. Anything less than the almost [one percentage point] that is now discounted will risk an adverse market response that could aggravate the fragility Fed officials are trying to repair.” If Fed officials decide to do any less than a full point, “we think the statement that accompanies such a decision will imply strongly that more easing would occur quickly if conditions warranted.” # Citigroup moved ahead of the rest on Friday, calling for a one-percentage-point reduction and saying “strong consideration ought to be given to an even larger reduction.” Its economists wrote: “The self-feeding downturn now in place shows signs of becoming deeply entrenched, while the ongoing marked deterioration in financial conditions is reinforcing the recessionary dynamic. … Such a rate cut coupled with other ongoing policy actions may not be sufficient to stabilize the financial system over even a short horizon.” # ISI Group says market performance today may determine the Fed’s Tuesday move. “If markets stay where they are, then a rate cut of [one percentage point] tomorrow would seem likely,” its economists wrote this morning. “If they reverse, the Fed could cut by ‘just’ [0.75 percentage point].” # Wrightson ICAP, which is forecasting a three-quarter-point cut (with the full-point option “running close behind”), also discusses the case for a half-point reduction. The key argument: a smaller cut would conserve the Fed’s ammunition, while a larger one would quickly raise market expectations for next month’s meeting. “The financial markets will continue to need morale boosters from time to time going forward, and the Fed’s ability to do something in such circumstances may be more important than the specifics of what it does,” Wrightston says. One option would be to cut by half a point and announce plans for an intermeeting conference call, allowing the market to assume an additional half-point cut ahead. The Fed would still have the option of doing just a quarter-point cut if conditions improved. “The default option of a [0.75 percentage point] rate cut would probably require the fewest changes from the January 30 policy statement,” Wrightston says. –Sudeep Reddy