August 17, 2007

AHAB SNAPS OUT OF IT:

CPI Increases Rate Cut Optimism (Andrew Farrell, 08.15.07, Forbes)

Despite indications the Federal Reserve might hold steady on rates, futures traders' optimism for a cut was bolstered by a Wednesday report of quiescent inflation.

The Labor Department said its Consumer Price Index rose 0.1% during July, which matched consensus expectations. The core CPI, which strips out volatile food and energy prices, rose 0.2%, which also hit expectations. CPI growth over the past 12 months is now 2.4% and core CPI growth is 2.2%.

The in-line inflation data rallied hopes of a Federal Reserve interest rate cut.


Fed cuts rate for loans to banks (AP, 8/17/07)
The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.

Posted by Orrin Judd at August 17, 2007 7:32 AM
Comments

It's the discount rate, not the funds rate; the latter is the main one people talk about. This indicates to me that they think it's mostly a temporary liquidity issue (too many highly-leveraged hedge funds, for one thing), not a fundamental issue.

Posted by: John Thacker at August 17, 2007 8:30 AM

John, they'll cut the Fed Funds rate when they next meet on a regular basis, too. Seems to me that this is one of many ways to effect a bailout without getting Congress to sign off on the form of a bailout.

Though if you look at the yield for Treasurys in the past week, it does make Orrin's point about the need to maintain a certain level of safe debt. And it made that point rather vividly.

Posted by: Brad S at August 17, 2007 8:42 AM

And it's actually a willingness to lend issue, and not a liquidity issue, per se. There's still quite a bit of liquidity, even before this morning's action. One of the few ways to affect lending (at least in terms of mortgages) is to get Fannie Mae and Freddie Mac to loosen its conforming standards, something their regulators have been extremely loathe to do.

I suspect that by the time Congress gets back in session that Messrs Bush, Bernanke, and Paulson will have called the head regulator and told him to put a sock in it.

Posted by: Brad S at August 17, 2007 8:49 AM
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