Opinion-Fed Could Cut Rates As Early As Next Week

by NewstraderFX

It does look like an emergency rate cut from The Fed is needed at this time and one could come as early as the week of August 13. The injection of liquidity that occured this week is not likely to enough to stem the tide of the sub prime meltdown. Look for the ECB to shelve their September rate hike as well.

According to Mark Zandi, chief economist and co-founder of Moody's Economy.com, "In October alone more than $50 billion in ARMs will reset". Monthly mortgage payments may climb by35 percentor more. For example buyer in 2005 might have signed on for a $200,000 mortgage, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1343.

Ken Goldstein, an economist for the Conference Board, estimates the mortgage market adds up to about $10T, with about 10 percent to 15 percent of that in subprime. Of that, some 15 percent or so is imperiled, meaning that about $150-200B is threatened.

On August 8th, Bush hinted at government intervention in the US stock market. “Treasury secretary Paulson and his advisors are paying close attention, as the market begins to readjust its assessment of risks and are watchful for any downturn,” he said. “There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust”.The Federal Reserve acted on the 9th and 10th by injecting nearly $40B into the system.

Those "advisors" could allude to the Plunge Protection Team, created by President Reagan in the 1980's.

After the 9/11 terrorist attacks, Former president Clinton advisor George Stephanopoulos told “Good Morning America”: “There are various efforts going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the market, what is called the “Plunge Protection Team.”

“The Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges have an informal agreement to come in and start to buy stock if there appears to be a problem. They acted more formally in 1998, during the Long term Capital Crisis, and propped up the currency markets. And, they have plans in place if the markets start to fall.”

No doubt that the PPT was hard at work last week and that this week promises more of the same.