Wednesday, August 22, 2007

Tell Me Again Why The Fed Needs To Cut Rates?

Markets finished up big today on speculation that the credit crunch is subsiding and this year's record pace of takeovers will not be hurt by liquidity issues. The Dow was up more than 150 points, the Nasdaq was up more than 30 and the S&P closed up 17.

This is the fifth straight day that markets have advanced.

So tell me again, if the markets believe the credit crunch is subsiding and mergers and acquisitions season is back in full swing, why does the Fed have to cut interest rates?

After all, the argument for an emergency rate cut before the Fed's September meeting or for cuts at the September, October or December meetings is that the overall economy has been harmed by the credit crunch and market turmoil of the last two weeks.

But that argument surely gets blown out of the water now that the Dow is less than 700 points off its all time high, the S&P 500 is nearing 1,500, the Nasdaq is making some nice gains, the bond market is getting back to normal and two big deals got batted around today (Dubai World bought into MGM Mirage and E-Trade and Ameritrade may merge) and more are expected to get done in September.

I guess the only reason Wall Street has for demanding rate cuts as of today is simple greed - they want cheap money to help inflate more bubbles and drive corporate profits.

We'll have to see if Helicopter Ben gets up into his whirly bird and gives it to them.

I suspect an emergency rate cut before the Fed's September 18th meeting (which the shriller of the market shills have been calling for) is out of the question unless current conditions change drastically.

As for what happens at the September meeting, that's probably still up in the air.

If the macro numbers (especially the job numbers) get ugly or if the credit market seizes up again, maybe Bernanke cuts.

But if the macro numbers are just so-so, equity markets continue to hum along and the credit market is okay, I bet Bernanke waits until October before making a decision on interest rate cuts.

Wall Street doesn't think this is so, but they've been pricing in an interest rate cut since the Fed raised rates to 5.25% in June 2006.

And they've been wrong every time.

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