I have said many times the Street believes the Fed will do everything in its power--including cutting the Fed funds rate--to address the liquidity crunch. Never mind that some want to argue that cutting rates won't make a difference. The Street thinks it will. As an example, here is what Joe LaVorgna at Deutsche Bank told his clients a couple hours ago.
1) The current medicine has not worked: "financial market conditions had to improve to keep the Fed on the sidelines with respect to cutting the fed funds rate. Unfortunately, market conditions did not improve:"
LaVorgna notes that the asset backed commercial paper market remains frozen, and that yields on Treasury bills remain over 100 basis points through the fed funds target.
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2) Unless conditions improve soon, the Fed will be forced to act:
"If this situation continues a much broader credit crunch could develop, which would have serious negative consequences for the economy. The Fed will not take this chance. Therefore, monetary policy makers need to prescribe a stronger medicine."
3) There will be more than one cut:
LaVorgna believes the Fed will reduce interest rates at the September 18 FOMC meeting by 25 bps and retain its easing bias, and then another 25 bp at the October 31 FOMC meeting, and look for them to again retain its easing bias.
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