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Note Japan’s proposed fiscal responses: cutting corp tax and extra budget, while the proposed increased consumption tax has been delayed.
Same in most nations around the world.
Fiscal responses ‘work’ while interest rate cuts don’t.
The US tax rebates worked while there is no econometric evidence the rate cuts did anything, except maybe make things worse as they reduced personal income and contributed psychologically to a USD sell off and spike in import prices that probably hurt consumers at least as much as it helped exporters.
The Fed could to anything today from unchanged to a 50 cut.
They seemed to have decided to use interest rates for ‘monetary policy’ and other tools for ‘market functioning’.
So for market functioning they just expanded the scope of the TAF and the Treasury lending facility, and may do more of that type of thing at today’s meeting, including adjusting the terms of the discount rate.
The question is whether falling commodities and the stronger USD will lead to a further rate cut.
What the Fed knows and has recognized since the Bear Stearns episode is that markets are going to open every day and do their thing, as the last week’s activity has demonstrated.
The Fed’s perceived risk of markets simply not opening and not trading has subsided.
Also, with the Treasury take over of the agencies mtg rates have dropped over 50 bp and availability of mortgage funding has been sustained.
The Fed considers this an ‘easing of financial conditions’ and is the move they’ve wanted to see to support housing, which has shown signs of stabilizing.
And the Treasury has shown it’s there to ‘write the check’ as it sees the need to prevent systemic risk.
So from that point of view there has already been a substantial ease in ‘financial conditions’, and the Fed may not see a need for further immediate ease.
Their forecasts will continue to show ‘moderating inflation and continued downside risks to growth’.
It all depends on their fear factor. They could leave fed funds unchanged or cut up to 50, depending on their concern regarding systemic risk.