Ben Bernanke and the rest of the Federal Reserve are scheduled to meet tomorrow morning, and the overall consensus is that the Fed will keep the interest rate steady at 5.25 percent.
Volatility and concerns surrounding the stock markets and the consumer debt levels have several investors believing the fed should lower rates by years end. The November fed funds contract shows a 100 percent probability the central bank will cut its target rate to 5 percent by its Oct. 31 meeting, compared with 14 percent odds on July 23.
Thoughts providing the general consensus include the worries over the falling dollar. Today the dollar fell to a near record low versus the euro, and reached the lowest level in four months compared to the yen as worries in the subprime arena are drawing more concerns.
Several hedge funds and large banks have run into trouble because of its positions with subprime loans, and today American Home Mortgage Corp has filed for bankruptcy. The worries have increased as investors with good credit standing are having trouble making payments with the rising interest rates on home mortgages. The tightened borrowing stance has led to the consumer recoil in their spending and borrowing habits as last weeks numbers indicated increased savings and less than expected spending levels.
The Fed might need to take action soon to help control the problems in the housing market to insure that the current problems don’t help increase the probability of a recession. Although this is an ongoing problem, other factors are helping increase the uncertainties in the market.
In July, the Labor Department reported on Aug. 3rd that 96,000 jobs were added, compared to expectations of 135,000 jobs. Following the drop in jobs, the unemployment rate increased by 0.1 percent to 4.6 percent in June. The labor market slowdown is another factor leading to the potential rate cuts by years end and is also affecting oil prices.
The price of oil fell this morning amid concerns that the labor market slowdown would drive demand for oil and gasoline downward. This price of oil this morning has decreased more than two dollars to settle at $73.40.
With several signals pointing to the potential decrease in cuts, the Fed is more than likely to remain steady right now with its rate. Some analysts believe that the Fed will change direction of its wording to possibly provide some stability in the market much like it did in March of this year. If current slowdowns and signs of recession continue, its is probably certain the Fed will end its year long run of 5.25 percent and drop the rate level to 5 by years end.