Tuesday, September 25, 2007

“One and Done?” Right!

When the Federal Reserve Open Market Committee reduced interest rates by 50 basis points last week, it took the markets by surprise. Almost immediately after the rate cut people began to say about the move was it “One and done?” Over three years ago, the same question was raised when the Fed started on its 25 basis points every meeting death march. I wondered, “Has the Fed ever increased or decreased interest rates in a cycle only once?


I went back to the 1950’s and I could not find one example in either direction that the Fed was “One and done”. The real question is how much more will the Fed have to reduce interest rates? The market currently has the 90-day T-Bill at an interest rate of 3.78%, the Fed Funds target rate is almost one full percent higher (4.75%). This difference would seem to imply that the Fed is behind about one full percent as to were the markets thinks the interest rates should be now.


The news this morning on both retail sales and housing were very bad and now the focus on September 25, is with all the things that are happening, the big concern is how will holiday shopping season turn out? It is three months until Christmas and being concerned about retail activity that far show the level of concern in the markets about the reliability of the consumer. If this news was not bad enough the level of consumer, confidence fell from 105.6 to 99.8 the lowest level since November 2005.


One annalist that I heard this morning indicated that the last significant correction in the housing market took 5 years to bottom out and we are in about two years from the top in the market, still a long way to go. She suggested that prices have not backed off much except for the builders trying to get out from under their debt by dramatically lowering prices to clear inventory.


As I indicated on and earlier Blog posting I though that people will hold out for the Spring selling season of 2008 and if they don’t see any activity we may well see a crack in the price of housing. The consumer sat on their wallets in the month of September as sales at Target, Wal-Mart, and Kohls and others were below expectations. Lowes the big home improvement center said that they would probably miss the low end of their earning forecast for the year.


All of this information has to weigh on the Feds minds as they think about their next meeting on interest rates. If the jobs number due out a week from tomorrow is as bad as the September number I would expect the Fed to lower interest rates at the next meeting and concern for the economy will overshadow the concern about inflation the policy statement.


Dan Perkins

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