Will the Fed Cut Interest Rates on Tuesday?

With the bankruptcy filing by Lehman Brothers will the Federal Reserve’s Federal Open Market Committee decide to cut interest rates by a quarter of a percent? Here are some of the recent events that will probably be discussed at the meeting,

  • Wall Street is in crisis mode. On Sunday, investment bank Lehman Brothers Holdings Inc. filed for bankruptcy, triggering fears of cascading losses across a range of financial institutions.
  • Lehman’s demise came a week after the government crafted a rescue plan for U.S. mortgage finance companies Fannie Mae and Freddie Mac, which had been brought to their knees by the housing market collapse.
  • Late on Sunday, the Fed announced a slate of measures to enhance its liquidity provisions and keep the financial system afloat as the global credit crunch, now in its second year, seems to be getting worse, not better.
  • U.S. stock markets were hit hard on Monday. The Dow Jones industrial average .DJI tumbled more than 2 percent.

Also, the not so recent increase in the unemployment rate. However, countering this was the stronger than expected growth for the last quarter, revised to 3.3%. But was that due solely to the tax rebate checks? If so, then growth could slow again. Also, there is the reduction in oil prices. This can have a downward effect on inflation thus reducing the need/pressure on the Fed to keep interest rates steady or even take them higher.

In any event, my guess is that the probability of a rate cut just went up.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. Jeffrey W. Baker says:

    Futures markets are priced for 50% odds on a rate cut tomorrow. Last Friday, futures prices were for odds of less than 10%. Of course, futures markets don’t really predict anything, but they reflect what traders are expecting/hoping for.

  2. Damn Christopher cox, MBSs and the desire to make 19 investment houses more important than me, the common man

  3. Steve Verdon says:

    Of course, futures markets don’t really predict anything, but they reflect what traders are expecting/hoping for.

    I disagree. In markets with a large enough number of participants it could be the biases/hopes, etc. can be offsetting leading to a reasonable expectation/predictor of future events. Of course, this assumes that market participants are not making systematic errors. It is that last part where we get into trouble.