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Posted by warren mosler (208.49.176.241) on 08:01:33 10/31/07
Dear Warren,
Many thanks. This is very enlightening and bears heavily in terms of the
imminent decision of the Fed on FFR today.
As I read the news this morning I am struck by the FT headline "Data fuel
fears of slowdown in the US" and reading the piece it clearly suggests that
"consumer confidence sinks to a two-year low". This it is argued in the
same publication produced a fall in the dollar yesterday that reached
record lows. The same newspaper also suggests that there is growing
evidence "that the credit sqeeze and housing meltdown are spreading to the
rest of the domestic economy" and this "will increase pressure on the
Federal Reserve to set aside concerns over rising inflation and cut
interest rates today". Could it be I wonder that the Fed predictions are
different from ours? If the answer to this question is a probable yes, then
it makes it clearer why the Fed may today go for a cut in FFR, dare I say
slight higher than what the market expects?
Best wishes,
Philip
Dear Philip,
The market is fully pricing in a 25 cut, so it will be no surprise.
My point is that Fed cuts are currently driven by 'market functioning'
and not concerns over 'weakness' so a cut today is an indication they
consider 'market functioning' sufficiently problematic for a cut.
Note eurozone flash inflation up to 2.6 when 2.3 was expected, Mexico
and other cb's hiking due to price pressures, US cpi moving up towards
4%+, what can be called 'substantial excess demand' for food and
energy, gdp growing sufficiently even without housing as exports pick
up the slack, bank earnings doing well, equities up over 10% for 07
and earnings ex housing still growing nicely at double digit rates,
unemployment low and personal income remains firm, and the larger
subtractions from housing are well behind us.
'Market functioning' still has some soft spots- ff/libor narrower but
still 20 bp wider than 'normal' for example, and jumbo mtgs being
packaged and sold but not like before.
This is what I suggest caused the Fed to cut last time and we will
soon know if it remains sufficiently problematic for another cut.
Two more numbers today- q3 GDP and the adt advanced employment number.
The Fed probably won't be influenced by either, particularly after
the -4,000 job number before the last meeting that later got revised
to up 89,000.
All the best,
Warren
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