In recent days the market has been alive with talk of the
Federal Open Market Committee
doing another intermeeting rate cut. But don't hold your breath.
On a number of occasions last week, there were rumors that the Fed was in the midst of an emergency meeting, that trouble in Turkey (where there is a currency crisis) would provoke a quick move, that an unnamed "Bermuda-based" hedge fund had blown up, again pointing toward a surprise easing.
The talk picked up in earnest Friday afternoon, when
chief economist and former Fed governor Wayne Angell put the odds of a cut before the scheduled March 20 meeting at 60%. That comment revived U.S. stock markets, turning a sharp Nasdaq decline into a mild rise. Monday, Angell was back at it, boosting the odds of a surprise rate cut to 80%, as stocks once again rallied. The March fed funds futures contract, which trades off expectations for the fed funds rate, continues to weigh heavily toward an intermeeting cut.
Nothing has quelled the speculation. Never mind that Turkey's troubles don't seem to have had too much of an effect elsewhere, that no hedge fund troubles emerged, that Angell, on a conference call Monday, gave little reason for an intermeeting ease other than that the price of gold remains stubbornly low.
Just the Facts
Market expectations aside, many Fed watchers see little compelling evidence for the Fed to ease ahead of March 20. If you run through the economic data that have come out since the Fed's January meeting, you'll see that most have come in stronger than forecasters expected. On top of that, there has been a surge in corporate bond issuance and mortgage refinancing activity. Meanwhile, spreads between corporate debt and Treasuries have come down, and the Treasury yield curve has steepened. All these things indicate the Fed's cuts are having an effect, reducing the likelihood members will feel the need to make another pre-emptive move.
In fact, the only thing that's really weakened significantly since the last Fed meeting is the stock market. The
has slipped 8.4%, while the tech-stuffed
has dropped a whopping 22%, touching lows it hasn't seen in over two years. The Fed hasn't acted on that drop so far, however, suggesting it would take a deeper selloff in stocks, or some nasty economic data, for it to move.
"The Fed would like to avoid another intermeeting cut," says
Banc of America Securities
chief economist Mickey Levy. "If the stock market absolutely collapses, or the economic data collapse, then they might, but I think they want to avoid it."
Intermeeting moves by the Fed are rare. Since it moved toward being more open in 1994, the Fed has cut between meetings only twice -- in the aftermath of the Russian debt crisis in 1998 and this January. This rarity has made intermeeting moves much more forceful -- they send a message to the market that the Fed intends to be much more aggressive than usual. If the Fed went intermeeting more often, however, that forcefulness would wear off.
"I think they want to save these things for really significant and important times," says
J.P. Morgan Chase
chief market analyst Don Fine. "It's a matter of keeping the gunpowder dry."
If it's merely a matter of assuring markets that it is on the case, the Fed has other tools at its disposal. Chairman
speaks before Congress on Wednesday, and again on Friday this week. Wednesday's testimony before the
House Financial Services Committee
was to have been a rehashing of what he said before the Senate a couple of weeks ago, but the Fed has let it be known the chairman is revising his prepared remarks. With only three weeks to go before March 20, it might make more sense for the Fed to signal it remains aggressive than to cut now.
"The closer we get to the Fed meeting, the greater degree of stress is going to be required to get the Fed to go," points out
Credit Suisse First Boston
economist Mike Cloherty. Sure, that stress could indeed present itself -- a big selloff in stocks or a nasty
Purchasing Managers' Index
on Thursday could do the trick. But investors pinning their hopes on the Fed cutting rates before its next scheduled meeting had better be ready to be disappointed.