Those hoping that the “Greenspan put” lives on in his successor are likely to be disappointed, says Lex on Monday. And they might be particularly disappointed this week.
Ben Bernanke, Fed chairman, has made pretty clear in the past that he does not plan to ride in with interest rate cuts to save the markets from themselves. Instead the Fed will take its decisions based on the economic data, notes Lex.
Recent turmoil in the credit markets, which stemmed from problems with subprime mortgages and has caused serious stock market jitters, “is therefore unlikely to get Mr Bernanke pulling the trigger”, says Lex.
“But he will be watching very closely to see if there is a real economic spillover.” And “spillover” is a particular risk, notes Lex, “given that most of the pain so far has been in credit”. There is a possibility that much tighter lending standards to high-risk consumers and companies will also sustainably raise the cost of regular borrowing, helping to slow an economy that is already expected to grow at a disappointing pace in the second half, Lex adds.
“No wonder the futures markets are suddenly pricing in at least one interest rate cut by the end of the year. Recent data have given the Fed slightly more room for manoeuvre. The labour market has softened a little, with the unemployment rate ticking up to 4.6 per cent and weak job creation figures. Meanwhile, the rise in the core personal consumption expenditures index, the Fed’s preferred measure of inflation, has finally fallen back below 2 per cent, the top of its target range.”
On top of that, says Lex, news from the housing market has continued to worsen rather than stabilise, as many hoped. “That could continue as mortgage rates for less credit worthy borrowers have risen. Even for prime borrowers rates have not fallen in line with Treasury yields in recent weeks.”
A cut in short-term interest rates this year is not yet a foregone conclusion. But the Fed can expect to be back centre-stage, starting from this week when all eyes will be focused on any comments it makes about the impact of rollercoaster markets on the economy.
Indeed, in a separate report on Monday, the FT notes that the slide in US stocks last Friday prompted calls for the Fed to intervene by cutting interest rates this week. And some economists expect the Fed at its Tuesday meeting to acknowledge the risk that the weakness in the US housing market could spread to the broader economy.
Even though the Fed is expected to leave rates unchanged this week, US Treasury yields tumbled on Friday as the futures market priced in a strong chance of two cuts in the Fed Funds rate by the end of the year, the FT adds.