Another Fed rate cut expected today "They" say.

Reporter Jennifer Schonberger talks with SmallCapInvestor.com senior analyst Benson George about the implications of the Fed's rate cut.





Oct. 29 - Wall Street awaited the Federal Reserve's latest attempt to ease the pain of the world's worst financial turmoil in 80 years.





ALLAN ROBINSON
October 29, 2008
The rate-setting arm of the U.S. Federal Reserve Board steps up to the plate today for the second time this month after making an emergency rate cut just three weeks ago.

Investors are betting the Fed will lower the federal funds rate by half of a percentage point to 1 per cent, matching the size of the cut it made earlier this month in a co-ordinated action with other central banks.

"It will signal they are concerned about [the credit crunch] spilling over into the real economy," said Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc. "They will go to 1 per cent and keep their fingers crossed."

WHAT ARE THE EXPECTATIONS?

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The Fed had been expecting the unemployment rate would rise to a 5.3-per-cent to 5.8-per-cent range, but now the consensus is for 6.8-per-cent unemployment, and that is even probably too low, Mr. Chandler said. "That tells you how fast the real economy is deteriorating."

Nevertheless, some economists say a cut of a quarter of a percentage point is not out of the question, especially if the Fed indicates it is leaning toward a follow-up rate cut.

"I think there would be disappointment if they only followed through with a 25-basis-point cut at this stage," Mr. Chandler said. (A basis point is 1/100th of a percentage point.)

Credit conditions globally remain extremely tight and U.S. banks would be helped by a rate cut.

Even Canadian banks, which for the most part have avoided the global crisis, are still far from being back to normal despite the rate cuts and other central bank actions.

"All of that is helping the banks and it's greasing the financial wheels, but not much has moved down to the borrowers," said Edward Jong, senior vice-president and fixed-income portfolio manager for Mak Allen & Day Capital Partners Inc., an affiliate of frontierAlt Management Ltd., manager of the frontierAlt Opportunistic Bond Fund.

The yield on five-year Canadian bank bonds is 250 basis points higher than Canadian government bonds and subordinated bank debt is 327 points over government bonds, compared with a normal spread of 30 points at the start of 2007, Mr. Jong said.

"The banks are still disadvantaged. Whatever the central bank is trying to do to foster consumer lending is being negated," he said, referring to the high borrowing costs for the banks.

HOW WILL MARKETS REACT?

So far there are few signs that the actions being taken by the central banks to deal with the credit crisis are having much of an effect in the stock markets.

The VIX, which measures the implied volatility in the S&P 500 options, remains near a record high.

It is critical that confidence is restored to enable banks to make "loans to individuals, companies and each other for that matter," said Clancy Ethans, senior vice-president and chief investment officer for Richardson Partners Financial Ltd., and Andy MacLean, director of private client investing.

The core of the problem remains the U.S. housing crisis, they said in a report to clients. "The housing market must also be addressed through a massive legislative effort that would only be likely with a new administration in the United States," they said.

"We expect that the plan will eventually be successful in stabilizing the current crisis, free up lending through the financial system, and as these efforts take effect, we should see a measure of confidence return to the equity markets," they added.


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