Bernanke Doesn’t Want to be the Grinch Who Stole Christmas

November 30, 2007

If you didn’t think that a rate cut was possible next month, then you have to believe it now. Last night, the head honcho at the Fed, Ben Bernanke repeated the dovish comments made by Fed Vice Chairman Kohn earlier this week. He told the markets that the relapse of funding problems has tightened conditions in the financial markets significantly. He also added that house spending is “soft” and warned of more difficult times to come for the US consumer. Finally Bernanke is waking up to the worries that the street has had for some time, which is that higher energy prices, a weak housing market, tight credit conditions, declines in the stock market and greater mortgage costs will be too much for the average Joe to handle especially during the Christmas season when they will be spending more than they would normally want to (link to Bernanke’s Speech).

**Apologies for my horrible rendering of the Grinch, but hopefully it gave you a good laugh.

As a result, rate cut expectations have continued to rise. The following table is the latest stats on where US interest rates may be over the next 4 months. The futures market is now pricing in a 34 percent chance for a half point cut, up from 30 percent yesterday. I still don’t think that the Fed will cut by 50bp given the current inflationary conditions, but what the data does tell us is that the next rate cut won’t be their last. For this reason, I expect the US dollar to resume its downtrend.

The Fed will be cutting interest rates as long as these 3 conditions are met:

1) Financial Markets Remain Distressed
2) Risks to Inflation Do Not Increase
3) Remaining Economic Data Do Not Come in Stronger than Expected

Posted in Bernanke, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve