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Non-Voting Plosser Sets Hawkish Tone


Investors are misguided if they think rate cuts are going to fix anything or reignite a love affair with either stocks or housing.


When the Fed wants to set an untenable position it tends to do so with non-voting members. That is happening again today as Plosser doesn't soften hawkish tone on rates:

In a speech at the University of Rochester, Plosser said the Fed cannot resolve the cause of the tension in financial markets, uncertainty over the value of complex securities tied to subprime and other mortgages and who holds these derivatives.

"It is important to recognize that the Fed cannot resolve this price discovery problem. The markets will have to figure this out," Plosser said in his prepared remarks.

  • "Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks," Plosser said.
  • Indeed, rate cuts might only delay the painful process, he said.
  • Philadelphia Fed President Charles Plosser strongly suggested that he is not in favor of an additional rate cut at the next policy meeting on Dec. 11.

Plosser is correct that rate cuts will delay the recovery for the simple reason it will prolong the agony. However, Plosser should have stopped there. Instead, he went on to talk about rebounds in mid-2008 and the economy recovering on its own. To that I say fat chance.

Furthermore, his statement that "the rise in oil prices and the simultaneous increases in a broader basket of commodity prices suggest that significant inflationary pressures exist in the economy and thus the Fed must be very vigilant," suggests that he does not know what inflation really is.

Credit is drying up and that is far more significant than oil prices.

With that in mind, Curve Watchers Anonymous is watching interest rate probabilities.

December FOMC Meeting Outcomes

Click here to enlarge.

What happens at the next FOMC meeting is going to depend on jobs. I suggest jobs will be bleak and point to another round of massive layoffs at Citigroup (C) for what is likely to happen across the board in financials and retail. Thus, I expect another cut, no matter how misguided it may be. So does the above probability chart.

The only problem is, investors are misguided if they think rate cuts are going to fix anything or reignite a love affair with either stocks or housing. Consumers and businesses alike are in no position to expand borrowing. Capital impairments are going to take a lot longer to fix than anyone thinks.

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