Various observers and analyst read different meanings into Brother Bernanke’s much awaited speech last Friday, paying as much attention to what he didn’t say as to what he actually say. The pro rate cut people were happy that he states that the Fed would be doing all its means to avoid recession. On the other hand, those that think that a cut this coming Sept is premature takes solace from Bro B’s statement that it is not the Fed’s role to protect the greedy sub prime investors from loss and he believes in keeping his long term inflation target in check.
So will there be a cut in Fed rates?
The market seems to be 100% sure that a cut of a quarter of percentage point is certain. In fact such expectations appear to be hardening into near-conviction among most of the investors in the US and everywhere, which spells further turbulence for financial markets and a strong negative reaction if the Fed does decide against the lowering the rates.
By lowering interest rates, it will prevent the Sub prime disease from morphing into a cancerous virus i.e. prolonging the housing slump, hurting consumer spending and the economy. To conclude, market will rally resulting in a stronger economy with higher inflation than ever.
By keeping the rates unchanged on the other hand will probably keep us happy since the price of fish ball noodle will not overnight rise to $5. However the stakes are really high since it is unknown how many people will as a result lose their rice bowl because of the wrath of the market.
Thus weighing the possible consequences of remaining idle or giving the market what they expect, it will actually be better for Bro Fed to choose the lesser of two evils, CUT the interest rates my friend and engineer a longer period of slow growth to bring the inflation rate back to the desired level.
Techno Bunny
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