Markets Push for Rate Cut But Might Not Get One

Financial markets are widely expecting the Federal Reserve to cut interest rates today, but they may not get their wish.

AP

What the Fed may do, however, is signal that it's prepared to cut rates if the crisis on Wall Street gets any worse.

The central bank, which began its regular policy meeting this morning, pumped $50 billion into the financial system on Tuesday to loosen up already tight credit markets. That was in addition to the $70 billion it added on Monday.

The Fed moves have led some to believe that the Fed is taking other steps besides cutting interest rates to keep the credit crisis from getting worse.

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“The Fed has been separating credit facilities and interest rate reductions for sometime now,” says Robert Brusca, chief economist at Fact & Opinion Economics.  “If interest rates were higher there might be some sense in lowering them, but they're not. I think the Fed wants to keep that powder dry."

Still, with the downfall of Lehman Brothers, AIG's funding problems and worries about other financial institutions such as Washington Mutual, the markets remain unsettled. And that's raised expectations that the Fed would step with a rate cut to calm things down.

"I really want to see (a half-point cut in rates)," Dennis Gartman, founder of the Gartman letter, told CNBC on Tuesday. "I think you need to send that kind of a signal."

Gartman acknowledged that financial markets know that a rate cut would have little impact on the crisis of confidence still haunting the market. But it would be a good signal for the public at large, Gartman said.

On Tuesday, federal funds futures showed a quarter-point rate cut was fully priced into markets.

But other market pros think the Fed should wait.

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“From a traditional standpoint it has added to liquidity … and taken steps to alleviate the crisis of confidence,” says Standard & Poor’s Chief Investment Strategist Sam Stovall. “It’s come to a point, where the Fed has said we're not going to bail out everybody.”

Pimco chief executive Mohamed El-Erian said the Fed should cut only if the recent liquidity injections by global central banks fail to calm volatile markets.

"The emphasis so far is on massive emergency liquidity provision. A rate cut would be needed if this injection fails to liquify broad segments of the markets," El-Erian, whose investment firm, Pacific Investment Management Co, manages the world's largest bond fund, told Reuters.

The Fed had brought down benchmark lending costs to a low 2 percent in seven moves from mid-September 2007 through the end of April to buffer the economy from the impact of the severe housing downturn and a freezing of credit markets.

In making any shift that would open the door to rate cuts, the Fed could cite a weakening economy and a more benign outlook for inflation.

The labor market picture remains steadily dismal, with eight consecutive months of job losses and the highest unemployment rate in five years in August.

In the meantime, although inflation hit a 17-year peak in July, as measured by the year-over-year rise in the Consumer Price Index, crude oil prices have declined by 34 percent since highs in early July as global demand has slowed, offering some hope that prices will moderate.

Indeed, the CPI fell 0.1 percent in August from July as expected, a report released early on Tuesday showed, the first monthly decline in almost two years and a sign the slowing economy is relieving some inflation pressures.