The FOMC Meeting:

You should already know that I expect the Consumer to weaken considerably going forward.  I expect weak retail sales figures going forward, reduced Consumer Sentiment, and a recession.

In fact, depending on the results of Friday’s Retail Sales figures, the Economy may even be set up for a deflationary period right now. 

The factors above are all coming into play now.  The consumer is getting cautious, and because the consumer is what drives the economy the FOMC needs to pay attention to that.  My main concern is that the FOMC is paying far too much attention to the Stock Market.  In my interview (CNBC)  on Fed Day last month I said that they shouldn’t say a word, just remove the bias towards inflation and let the Market settle. 

They didn’t do what I suggested, but then why would they listen to me anyway, right :-)  I am just a lowly Economist/Market Analyst who has proven that the Market is about to enter the third major down period in US History.

With my bruised ego out of the way, let’s take a look at what the Fed should do, what they will do, and what they better not do.  These are the good, bad, and the ugly scenarios in my point of view: 

THE GOOD:

The FOMC should cut Interest Rate by 50 basis points to lessen the debt burdens on the Consumer side and to allow lenders to feel more comfortable lending to consumers.  In addition, this would ease the pain of the ARM adjustments in the next couple of months.  This could keep the Consumer afloat during the most important shopping season of the year.  This, in effect, would ease the pain of a recession during Christmas Time, which is coming anyway.  Their commentary should be that they see concerns on the economic front and that the concerns about inflation have eased.

THE BAD:

(The most likely scenario) If the FOMC only cuts Interest rates by 25 Basis points they will not do enough to ease the pain of the upcoming recession.  Sure, they can make comments to ensure the Market that they will cut again if needed, but they need to stop playing to the wants of Wall Street.   The Markets are intelligent, quit trying to please them!  Don’t use sophomore tactics!  Actions speak louder than words.  However, the BAD scenario suggests that they will try to ease Wall Street’s concerns and try to explain their actions accordingly.  That’s not needed.  The recession will be much worse if the FOMC waits to cut rates (more than 25 basis points), but they probably will.

THE UGLY: 

(I don’t expect this but some people do)  If the FOMC doesn’t cut rates at all they will have made the worst mistake in modern economic history.  I can imagine them doing this as a way to say ‘we’re not playing to Wall Street, we’re doing what we think is right.’  However, that, in effect, would be playing to Wall Street.  Restraining Fed Action in the face of a borderline absent consumer is a very bad idea.  Not only would the ARM adjustments squash consumer spending patterns during the 4th quarter, but lending practices would remain constrained, and the Markets will start wondering if the FOMC may have an interest in raising rates. 

SUMMARY: 

I think the Fed should cut rates by 50 basis points and offer concerning statements.  I do not think they will though.  I expect them to cut by 25 basis points and tell the Market that they will cut more if needed and try to ease concerns (not the right approach).

During the last Fed meeting, EVERYONE said that the decision of the FOMC was the biggest that Bernake has ever faced, well that doesn’t come close to comparing with the importance of this meeting.  This is, without a doubt, the most critical decision in the last 7 years; it will act as the throttle for the severity of the upcoming recession.

I might add, the FOMC cannot stop the recession from coming; they can only ease the pain.  But they need to act now.

Good Trading. Thomas Kee.

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This entry was posted on Wednesday, September 12th, 2007 at 8:08 am and is filed under The Investment Rate, Economics, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.