Is there any possibility of a US Rate Cut?

Foreign Exchange Currency Outlook : The third week of every month is the big data week. See the WSJ calendar below. Tuesday and Wednesday are the heavy dates, with the Fed meeting on Tuesday the biggie and all activity grinding to a halt ahead of the 2:15 pm statement. Is there any possibility of a rate cut? The answer lies in whether the Fed thinks a marginal amount might be useful to an important player. At a guess, it widened the allowable collateral in its auctions to avoid lowering rates, but from the vantage point of Monday morning at 6 am, well before the bell, Tuesday at 2 pm is far away. Should stocks continue south as futures now indicate, the Fed might cut just to show it has a heart.
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Realistically, the contracting financial sector and contracting credit is the same thing as a rate hike, so the Fed could find justification for a cut without straining too hard. Bloomberg reports that “futures on the Chicago Board of Trade soared to a 86 percent chance that the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point, compared with no chance a week ago.” This is reported in the context of the falling dollar.
Weirdly, a rate cut is not such a bad thing for the dollar in the current environment. It could signal flexibility, adaptability, and decisiveness, characteristics sorely lacking in Japan’s lost decade and also in Britain and Europe today, where governments and central banks can see nothing other than inflation under the bed and lurking in the closet.

Inflation is simply not the only important economic variable under the current circumstances. It may be the most important if you are a new central bank trying to earn your spurs, or if in the past you have botched managing inflation, and also in the grand scheme of things of macro theory, or at least some versions of maco theory.

But during a financial sector crisis that is sure to result in severely deflationary conditions, you need to throw out the rule book. Will we get deflation? You bet. Bank failures, falling house prices and contracting credit mean deflationary conditions, not to mention the bubble having been burst on commodity prices, especially oil. This doesn’t mean oil is going back to $30-40 (and if it does, we will all be eating a steady diet of only potatoes), but it does mean that $60-80 is not a silly forecast, nor is a rate cut by the Fed tomorrow.

Again, this doesn’t mean the dollar necessarily falls, although normally it would.

Context matters.

Until we find out what is going on, we advise clients to exit the market and stay out. Whether there was or is intervention or not, we need more information before we can judge whether the strong dollar scenario still has legs. We can make the argument either way. We think the factors favor the dollar hanging on, especially if there was intervention, but let’s face it, the market turmoil today is going to be just awful and we advise a policy of risk aversion in which cash is king.

If you are not in the market, you are taking no risk.

Bye for Now

Barbara Rockefeller

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