Grim Bernanke makes rate cut seem inevitable
October 8th, 2008 | by admin |By Ros Krasny - Analysis
CHICAGO (Reuters) - A sobering economic assessment from Federal Reserve Chairman Ben Bernanke on Tuesday was widely seen as laying the groundwork for a deep cut in U.S. interest rates, possibly before the Fed’s end-of-month meeting.
Given a mix of recent weak economic data and a worsening outlook for growth, the Fed “will need to consider whether the current stance of policy remains appropriate,” Bernanke told the National Association for Business Economics.
The comments electrified short-term interest rate futures markets, where dealers piled on new bets that the Fed will cut its benchmark lending rate to 1.25 percent this month from the current 2 percent.
“The Fed chairman just gave the green light for a rate cut at the October meeting if not before,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Shortly later, minutes from the mid-September Federal Open Market Committee meeting revealed that a faction of Fed policy-makers had been almost — but not quite — ready to push for a rate cut then, before financial markets lurched lower again.
Rate futures now show a 44 percent chance for a three-quarters of a percentage point rate cut this month, and talk continued that the Fed, either alone or with other central banks, might move before its October 28-29 scheduled policy-setting meeting.
Futures earlier on Tuesday had initially erased prospects for a 75 basis point rate cut this month after the Fed announced plans to buy commercial paper, the short-term debt that many companies use to fund their day-to-day operations.
“The cut could occur as a coordinated move with the European Central Bank and other central banks,” said Asha Bangalore, economist at Northern Trust in Chicago.
