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Fed Rate Cuts Appear Likely


With the current financial turmoil, it's looking more likely we'll see the Fed cut rates. As reported in this Bloomberg article, Bernanke has "signaled policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy." For the last several months, the Fed has held the target for the federal funds rate steady at 2%. During this time the risk of inflation outweighed the risk of worsening economic conditions. But in Bernanke's speech today, it's clear he's seeing a change:
Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.

The next two FOMC meetings for this year are scheduled on October 28-29 and December 16. We may even get a rate cut at an emergency meeting. Here are excerpts from the Bloomberg article:
"With financial markets in such turmoil the odds of an inter-meeting cut are now above 50/50," said former Fed governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.

Traders see about 40 percent odds of a three-quarter-point cut in rates at or before this month's meeting, futures prices showed as of 4:09 p.m. in New York. The probability of at least a half-point cut remained at 100 percent.

If the fed funds rate drops, I'm afraid we'll likely see savings account and CD rates also drop. So if you're thinking about a CD where you can lock in rates, it may be a good time. As we learned earlier this year, the Fed can lower rates very fast.

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Anonymous   |     |   Comment #1
Bernanke is a piece of flying scumbag garbage. Why do you think that Lehman Brothers was tied to the federal reserve and why do you think that all federal reserve meetings are behind closed doors?

Lowering interest rates will harm this economy even more just like last time. We can lower interest rates to 0% and people will still avoid the markets like the plague.

Team Bush has a mission of turning the United States of America into the poorhouse of America.
Anonymous   |     |   Comment #2
**** straight girlfriend!
Anonymous   |     |   Comment #3
Yes sir!

Wasn't it the artificially low rates that were set by the Fed part of the reason that got this whole housing mess started?

And wasn't it Beranke that told the American public several months ago, that the housing crisis was well contained and wouldn't spread to other sectors of the economy? Yea, right!

Now tonight our two presidential candidates will be on TV telling the voting public what they think we want to hear and which ever one becomes president won't give a darn about us after the election.
Anonymous   |     |   Comment #4
I think this is just for the "signal effect" (which isn't working) and not a real change in rates. The bailout means we have to sell billions of Treasury bonds to finance it, plus more bonds to refinance the rest of our debt. This relys on foreigners buying our bonds. Since we are now less of a safe haven than we were, a lower interest rate may make it impossible to sell the bonds.

The freeze on credit - especially bank-to-bank credit is because it's just too risky. A German bank was nicknamed "the stupidest bank" because it transfered $463 million to Lehman the day it declared bankruptcy. Other banks don't want to risk the same loss.

The stock market is crashing, the commodities market dropping - a lot has to do with regulations and oversight proposed for hedge funds and oil speculators.

As banks consolidate (big, healthier ones gobbling up troubled ones), there will be less need to offer high rates to attract deposits to create liquidity. It seems Chase needs less new money than Countrywide did - maybe they already have a foot hold into the bailout money.

I think the Fed announcement of possibly lowering rates is just a last ditch attempt to revive the stock market before the election. Remember Bernanke is a Bush appointee (flunkie) - and the state of the economy is the biggest risk to the Republicans (at all levels) in this election.
JAC   |     |   Comment #5
The Fed cut its benchmark rate by a half point to 1.5 percent today - Wednesday Oct 8th. Last time it was this low was Aug 2004.
Laura-n-Sasha   |     |   Comment #6
This is so crazy. Why can't they just leave the interest rates alone? Now we will get the higher inflation again and us savers will have a hard time. Thanks for all of your good work.
Anonymous   |     |   Comment #7
Looks like our government and the Federal Reserve want to punish us savers who have bee frugal with our money and didn't try to live beyond our means.
Anonymous   |     |   Comment #8
Hi...how sad it all is! Just wanted to tell you in way of suggestions (though I'm not a savvy finacier at all!), that last August I bought a CD-type annuity from Jackson Nat'l Life, for guaranteed 9 years at 5.68%, no fees or charges of any kind and a free up to 10% per year can be withdrawn also at no charge. Rate came down so I'm in the process of buying the same at 5.46%, same conditions, etc. From ING, 5 years at 5.05%, min. $5,000, also no charges, yearly free withdrawals, etc.

Is this, financially speaking, better than bank CDs?...I don't know. I guess as with the domino syndrome, once something's wrong at one side, all others will be also negatively affected, but...I wanted a tax shelter and got it.

Just an idea? I wish us all good luck! :o)