Case for 50 Basis Points (ForexHound.com)

Ben Bernanke went from being helicopter Ben to B-1 (Bomber) Ben in his speech January 10 and no better demonstrated than the January 22 “surprise” 75 basis point rate cut. Bernanke and the Fed are front loading rate cuts to buy insurance against an unwelcome US recession…as far as the overall impact of easing on the economy (growth and inflation) the risk of doing less on rates is greater than the risks associated with doing more. Today is another opportunity to do more. Cutting 25 basis points is not in the realm of more. Ben Bernanke went from being helicopter Ben to B-1 (Bomber) Ben in his speech January 10 and no better demonstrated than the January 22 “surprise” 75 basis point rate cut. Bernanke and the Fed are front loading rate cuts to buy insurance against an unwelcome US recession…as far as the overall impact of easing on the economy (growth and inflation) the risk of doing less on rates is greater than the risks associated with doing more. Today is another opportunity to do more. Cutting 25 basis points is not in the realm of more. If the Fed wants to leave markets guessing about another between-scheduled-meeting rate cut ahead it will go 25. If not 25, then 50. A 25 cut also will draw focus back on the impact Soc Gen news would have had on the 75 cut if the Fed was made aware of it when French officials learned of the problem. It would suggest the Fed would have cut 50 not 75. So in the name of ending second guessing about the role Soc Gen equity unwind may or may not have played in the January 22 cut, then the Fed must cut a half point today. In the larger scheme of things 25 basis points is not a make or break event for the economy – at most it shapes market sentiment near-term. But the real economy impact is indiscernible – terminal Fed funds matter for the long haul and these seem to be headed to 2.00-2.50%. Lastly one should not underestimate how much Bernanke has embraced the need to stimulate the economy and this is no better illustrated than in his public support for a $50-150bln fiscal stimulus from the government. This is extraordinary and consistency implies a half point cut today.

So what will the statement look like? Well it can’t paint the Fed into another corner which has been the pattern of statements. No hints that the Fed has caught up and now on hold. The Fed at most will indicate that the recent easing has frontloaded significant stimulus and future easing will be data dependent. My only fear here is that if stocks go into a meltdown ahead the Fed will have a hard time cutting if it is locked into economic data releases and not asset prices. So look for some wording that includes financial shocks as well as real economic indicators. Inflation will get a mention but hardly the emphasis it has received in recent statements.

The downside is that Bernanke will have a difficult time fighting off allegations of a Bernanke put – cutting in response to stock market weakness. But in these fragile times he and the FOMC have more to worry about than unfavorable sound bites.

I also think the markets have fully priced the Fed and the new Bernanke – the B-1 Ben. I doubt the Fed is as much a market determinant in the period ahead as it has been in the past…the period of indecision is over. And unless you think the Fed is planting the seeds to a new asset bubble and or hyperinflation, I doubt there is much price risk for bonds, stocks and the dollar ahead from the Fed. The price risk for assets and the dollar ahead will mainly come from real economic variables…how hard a landing are we in for.

That said there are markets that remain very one-sided – emerging market FX, fixed income and somewhat less EM equities, commodities, equities (despite the latest correction lower) and Treasuries (worst of all possible worlds is priced into this market). Newtonian physics suggest at the very least some of these markets are due for a reversal. My take is the very hard landing scenario and this tells me that bonds hold, while stocks, commodities and EM get hit…data dependent of course.

David Gilmore

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More