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Could an Interest Rate Cut be on the Horizon?

13 September 2008

Surprised by the headline? You should be. Very few people are giving it any consideration, but I believe with a near certainty that if we break through 1200 on the S&P we’ll get one, maybe even later this month when Benny and his gang of board governors meet again. How do I know this? I don’t but I can tell you this much, that over the past year I have nailed every interest decision by Bernanke on the head, and I feel just as strongly about this one. Should the markets linger, we may not see it until the following meeting on October 29th. The last scenario is this: if the markets rally and finally start making up for lost ground, then interest rates will remain the same. There is nothing out there to suggest that they will do this, but with oil dropping like a rock, gold and all the other commodities out there pulling back significantly, and the dollar trouncing all the other currencies suddenly, the Fed is playing with the house’s money, and if need be will put some of its new found cushion to work.

But don’t think Bernanke can take the route of Greenspan and bring down the rates to zero. He doesn’t have that much flexibility, but he does have some – and yes, the dollar will be impacted negatively, and gold and other commodities will likely benefit. However, as we have seen with the Federal Reserve and any other government agency, all stops will be taken to stabilize the U.S. economy in the short-term no matter its long-term consequences.

So know this, if the markets continue to languish in Bear Country, expect the Fed to once again thrust itself into mix and use its short-term, “feel-good” mechanisms to stabilize the markets.

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