Wednesday, November 21, 2007

Will The Fed Cut Rates Again?

They may want the Wall Street to believe a rate cut is not imminent, but investors are already counting on a 0.25% cut. The central bank released its economic outlook, in which it projected slower growth in 2008, and, quite surprisingly, declining unemployment. The economic growth forecast was revised downwards from 2.5-2.75% to 1.8-2.5%. Meanwhile, turmoil in financial markets is in full swing, with the two largest mortgage financiers Freddie Mac and Fannie Mae reporting higher-than expected quarterly losses.

Shares of Freddie Mac dropped more than 28% after the mortgage giant announced quarterly loss of $2 billion and said it has trouble meeting its capital minimum, which may prompt it to cut its dividend. The company also warned that deeper losses may be coming in the future. Consequently, Countrywide got downgraded by Fox-Pitt, Kelton analyst Howard Shapiro on fears that Freddie’s trouble may mean less financing for the mortgage lender. Countrywide promptly released a statement saying it has “ample liquidity”, but analysts have trouble believing this. So, the Fed may have to cut rates on December 11th, especially if something big happens as a result of the current chaos. Inflation and the price of oil, however, are still pretty troublesome and if the latter hits $100, the chances for a rate cut are minimal. Time will show.

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