A half-point cut by the Fed a sure bet
February 29, 2008
After the Federal Reserve chairman finished his testimony in Capitol Hill, one thing was quite clear and obvious from whatever he said. A cut in the interest rates by at least half a percent is an almost sure bet. Although Bernanke did not exactly mention what course the Fed would be following next, the Fed head left the place only after giving everyone the strong impression that the central bank most probably will make another cut in the interest rates. From the gist of things, the cut is going to be by around half a point.
The policy makers of the Federal Reserve are planned to meet once more on the 18th of March to discuss their future course of action. As of now the futures registered on the Chicago Board of Trade point towards the investors believing completely on a half-point cut. Ti also shows that there is 32 percent chance that the Federal Reserve would cut the interest rates by somewhere around three-quarters of a percentage point.
Some of the leading economists are of the opinion that a 50 point slash would be a reasonable compromise considering the present economic scenario. However if the cut is going to be by more than that, the Federal Reserve would be in the line of fire for triggering a nation wide inflation.
Ben Bernanke had spent 2 whole days on the Capitol Hill testifying in the House as well as the Senate as a part of his semi annual hearing on the central bank’s monetary policies. During his testimony he had portrayed the three main problems the Fed is facing at the moment: the nation’s economy which is almost at the verge of a recession, completely unpredictable and unstable markets and the ever rising fears of inflation.
But throughout his testimony the main focus of his speech was on the health of the U.S. economy. Bernanke throughout the 2 day testimony was focusing on the downside risks to the economy that exists in the nation currently. Some of the main reason for the economy doing badly, according to him, is because of a housing sector that is doing very badly at the moment and because of the reduced consumer confidence in the country.
The remarks he made along with the various other economic reports that came out on the 27thand 28th of February indicates strongly towards the possibilities of Fed decreasing the rates. Even before Bernanke had finished with his testimony the leading investors in the country were talking about a half-point cut with almost utmost certainty. After the testimony was over the chances of Fed implementing a half-point cut is said to be at almost 94 percent.
If the Fed actually does implement the rate slash, it would mean the Fed fund rates would come to almost 2.5 percent. The Fed fund rates affect the prices on a number of consumer loans together with credit cards as well as mortgages.
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