My Two Cents

Another Rate Cut in the Offing?

Chris Farrell Oct 29, 2007

It’s a slamdunk in the opinion of Wall Street: The Federal Reserve Board will cut the central bank’s benchmark interest rate when the Federal Open Market Committee meets on October 31st. The reasons for the Halloween-day cut are obvious. Weakness in the housing market. Oil approaching $100 a barrel. Poor earnings reports from financial institutions. Tightening credit conditions. Worries about a retrenching consumer.

Still, I wonder if the Fed might surprise the markets by staying its hand for now. The reason is the declining value of the dollar on world markets. The fall in the dollar is a global wildcard. So far, it hasn’t caused any real problems and it has shored up U.S. multinational exports.

Nevertheless, a rate cut carries the risk of sending the dollar swooning, an event that would unsettle the global capital markets and perhaps even spark panic selling of dollar-denominated assets.

I think the judgment behind whether to cut rates or not by the Fed is a closer call that Wall Street believes.

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