Surprise Fed Rate Cut Coming?

Posted on September 11th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Wamu and Lehman are getting torched. What are the solutions? Well, Wamu is sitting on some $120 billion in Pay Options, HELOC’s and Subprime. Best case, a suitor would take a $50 billion hit. Yes, the Treasury or Fed could back stop the purchase but that is still a lot of lost coin.  On the other hand, the suitor would have 2500 branches on the West Coast and instantly be a major presence. It would take 15-years for Jamie Dimon to build this himself, using Chase as an example.

Lehman on the other hand has very little to offer anyone. I have no clue what their core competency is any longer other than providing office space for a bunch of people to go to every day to get out of the house.

All of this being said, what the heck gets thrown at these two problems to avoid a credit and stock market meltdown?  On that note, why are large cap banks such as Wells, Chase, State Street and US Bank rallying?

After the massive Fannie/Freddie bailout there is not much they can do to top that. Therefore, the only thing they have left is an EMERGENCY RATE CUT.  Hey, why not?  They have not thrown money at it in a while, the dollar is rallying and crude is lower. If they were going to do it, now is the time. 

This is all speculation on my part but my bet is for a cut sooner than later. -Best Mr Mortgage

16 Responses to “Surprise Fed Rate Cut Coming?”

  1. Respectfully disagree. There are plenty of (less dangerous) alternatives, and the current (negative real) rate is considered an emergency rate already. IMHO, it will take a considerable melt to move the FOMC to lower, and any FOMC move will not be preemptive. Think floating the TAF…

  2. I think there was some chatter about this on bloomberg, a 25 basis point cut. The dollar has rallied considerably since the last rate cuts and it gives the FED more leeway.

    Also since we’re entering the deflationary phase of this credit cycle, real interest rates are actually positive. Commodities have fallen sharply, banks are reducing leverage, lower credit creation is taking place, stocks are down 18% or more since their peak last year, housing is in freefall.

    The credit bubble which began in 1982 lasted 26+ years, at some point it had to unwind and the unwinding will be long, slow and painful.

    On top of all this according to the Bank of International Settlements, derivatives contracts have now exceeded 1,280 trillion dollars (Yes that’s right) So we have a deflationary scenario with this huge derivatives bubble and huge debt levels across the OECD.

    The Dow Jones P/E ratio is actually NEGATIVE and the S&P 500 P/E ratio is 23 last i checked, usually a P/E of 8-12 constitutes a buy. Stocks have to fall by about 50-60% atleast in order to reflect reality.

  3. I think you can take the rate cut to the bank. Competitive devaluation.

  4. No way Mr. M… I see only a rate rise in the distant future. Stable until around late November and then an eventual rise heading into 2009. I see MASSIVE printing before too long however… and Lehman and WaMu may be the cause. They both don’t make it through the weekend IMO. So let’s see $800 Billion to spend. $200 Billion to F & F, $250 Billion to the FDIC and $100 Billion to transportation and what is left? Whatever the case it doesn’t look good. A rate cut is HIGHLY unlikely IMO!!! We have issues and many of them on the forefront, but a rate cut is not one of them…

  5. i think your right on, and thats why i subscribed to your blog before it got huge. i think your completely right. if anything i think they should let LEH go under and at the same time cut the rate. the only problem i have with this is that i feel like the Fed is trading like the market now. they are so spuratic and are always doing something instead of letting the market just shuffle all this out. if LEH gets bought out thats fine i just think Helicoptor Ben should just leave his nose out.

  6. Absolutely world class analysis on the housing and mortgage market, but your views on Treasuries and the Fed just don’t make the grade. I recommend you stick to housing, your outstanding forte.

    Just a few days ago you were telling us that the dollar would fall in value. I pointed out immediately the absurdity of that view.

    You’re not going to see a rate cut at the next FOMC meeting.

    What is more likely is that the Fed, long accused of “inflating” and printing money will teach those folks a damn good lesson, with a nasty little depression heading our way.

    It’s payback time.

    Tony Buzan

  7. Viv – Not sure where you’re getting your data points. The median P/E on the S&P is roughly 16.5 over the last 50 years. There have been few times to buy at PEs of 8. Yes, that is a great buy, but if that’s what you’re waiting for, you’re going to be out of the market for years if not decades. History says, that is a losing proposition. As for the current PE I would suggest you look at trailing operating earnings publsihed by s&p. Nowhere close to 23.

  8. Cut or No Cut the FED & Treasury have done better than a rate cut they have essentially forgiven trillions in debt.

    But, in the short term The forgiving of debt is deflationary because our money is debt based.

    Therefore, dollar is gaining through simple supply shrinkage.

    The FED will and must recreate the trillions in debt it just forgave it will do it through the budget.

  9. A rate cut would not take me by complete surprise. The Fed is stuck and really cannot afford to raise rates so why not import some extra inflation…we really don’t have enough of that do we? These cuts have proven to be the remedy in the past…NOT! No lessons have been learned by these morons…you cannot print your way out of this. This will serve to stall the inevitible which I beleive will be a massive market dislocation…hang on to your balls!

  10. I think that inflation is coming down hard and unemployment is rising into a level that will cause the Fed to consider a rate cut. It’s a safe play for the Fed. Greenspan thought this way and Uncle Ben seems of the same mind. The Eurozone is headed into a recession and will probably behave in a similar fashion.
    With inflation under control and a recession in full swing, it would give them the green light they want to cut rates.

  11. A fed rate cut would be pushing on a string. Its main effect would be to cut the rate that “savers” receive on their deposits and could put the banks in worse shape as “savers” put the money in the mattress.

    It could help gold. It could help stocks. But it is too late to stop the deflation or shrinkage in the number of dollars or the shrinkage in the velocity of money.

    We are just attempting to re-do what Japan did in the 1990s.

    Real estate and consumption will continue to decline as debt must either be serviced or defaulted on.

  12. Mr M you are spot on. The rate cut will come some sooner than most expect. Every major economy is slowing and most of the developed world is already in recession. The emerging markets are not far behind.

    Rate cuts so far have not worked – almost every borrower group is paying higher rates today than they did at the start of the year. The Fed needs to cut to zero if necessary to lower borrowing costs and kick start lending.

    A few months ago the Fed was worried about inflation but that is now a distant memory. Look at TIPS breakevens, look at the yield on the long bond or howabout precious metals prices. The markets are not worried about inflation they are worried about DEFLATION.

    Bernanke has spent a lot of time lecturing Japan on what they should have done. It’s time he applied his own medicine. Every rate cut so far has been decided by the market. The Fed needs to show leadership this time and act before the market forces their hand.

  13. fedwatcher –

    I totally agree with everything you stated. I’ve been saysing same ad nauseum for months now since Fed Funds target @ 2%. Stability is the name of the game now; we don’t need a bunch of girations going on with monetary policy. And, yes, 1990’s Japan is the playbook now. We averted it (Greenspan) until now, as it has finally come home to roost. Stuart Hoffman, chief economist at PNC Financial Services Group Inc. says Fed Funds @ 2% until at least next spring (see link below):

    http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vEzBHz7cLdTY.asf

  14. Rate cut = hyperinflation = dollar collapse

    Simple, isn’t it?

  15. I think we have along way to go and quite a bit more pain to endure before the economy gets back on track. Certainly more bad news in the financials, more asset devaluation, unemployment, credit tightening, sales declines, government budget disasters, etc etc etc. Who thinks we have turned the corner? Anyone?

    I think we could very well see a FFR of 1.5% before we truly turn the corner toward recovery. We may not get a cut this year but we may be looking at several .25 cuts or one big .5 cut in ’09.

  16. I would not be surprised at all. I hope Ron Paul is able to look Bernanke straight in the eye and bring up the fact that Bernanke said Fannie and Freddie were not in trouble and how wrong he was.

    “If you can be wrong about something as important as Fannie Mae and Freddie Mac, what other important things are you wrong about? If this body is not capable of action, I suggest new leadership is needed. I move to a vote of no confidence in Chancellor Bernanke!”

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