Fed Rate Cut Poll and Discussion

[MilwaukeeMike]

Should the Fed cut the federal funds rate at their next meeting, if so, by how much.

Furthermore, do you feel the Fed cut is needed?

Will the Fed cut cause further deterioration the U.S. dollar?

Will the Fed cut cause inflation to rise?

[Francesca R]

Bernanke has pretty much said they will cut just now. The Fed Funds future shows an expected 80% probablility of 0.50% off rates.

[MilwaukeeMike]

Bernanke has pretty much said they will cut just now. The Fed Funds future shows an expected 80% probablility of 0.50% off rates.

Hahaha, nice avatar

[JonnyFive]

You know, technically the Fed doesn't cut the funds rate. They set a goal for the rate and use their ability to conduct open market transactions to try to adjust the market so that the Fed funds rate matches their goal. The Fed has no authority or ability to set the rate directly, as it is the result of the market for reserve funds between banks.

A gradual move to try to push some reserve funds out to the inter-bank market might be warranted, so I guess I'd agree that a marginal decrease in the rate would be a good thing. I don't know by how much precisely, as I don't have access to all the information involved.

A decline in the funds rate (the price of credit) will almost certainly cause inflation to increase, although the level of increase may be quite small.

You're going to need to define "deterioration" a bit better. You mean decline in value relative to foreign currencies? Decline in per-dollar value due to inflation?

[MilwaukeeMike]

You're going to need to define "deterioration" a bit better. You mean decline in value relative to foreign currencies? Decline in per-dollar value due to inflation?

Sorry, I'm asking that relative to other currencies.

[JonnyFive]

Sorry, I'm asking that relative to other currencies.

Gotcha.

I guess the only real answer to that would be "maybe." There's a lot of stuff going on other than just the fed funds rate that could impact the relative value of the currency a great deal more. At the basest level, the inflation that the increased amount of available reserve funds tends to create does tend to decrease the value of the US dollar versus other currencies.

If the Fed tries to adjust the reserve fund supply dramatically, it could cause foreign investors to lose confidence in the US dollar and dump it (which would devalue it) as well, but that's something that is extremely unlikely to occur with the minor adjustments the Fed is trying to target with whatever open market transactions they choose to utilize.

[rjh01]

While your Fed is thinking about cutting the interest rates, in Australia the Reserve Bank is thinking about raising interest rates. What a strange world.

[Francesca R]

A number of "Fed watchers" are predicting another 0.5% rate reduction at the scheduled FOMC meeting this coming week, on top of the "emergency" 0.75% cut last week.

Who thinks the Fed has panicked, and does it matter if they have? Is stabilising equity market sentiment the most important thing they should be doing? None of the other central banks are following this lead.

FYI here is this week's Economist leader on the subject: http://www.economist.com/opinion/displaystory.cfm?story_id=10566731