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By Jennifer Yousfi
The market is anticipating another rate cut at the Dec. 11th FOMC meeting – despite Fed Chairmen Ben Bernanke's deliberately neutral remarks in Charlotte, NC this past Thursday.
Bernanke acknowledged some weakness in the economy, but reiterated that economic data remains mixed. "We will be receiving a good deal of relevant information in the coming days. In making its policy decision, the FOMC will have to judge whether the outlook for the economy or the balance of risks has shifted materially," he told the Charlotte Chamber of Commerce, who honored the SC native with their "Citizen of the Carolinas Award."
Many important economic indicators, including the November unemployment report, will be released this week, and Bernanke's remarks indicate he is inclined to wait for the official data before leaning either way. If the labor market and wages remain strong, the Fed may hold rates steady in a bid to dampen inflationary concerns.
Despite Core CPI (excluding food and fuel) holding relatively steady over the past several quarters, gas and food prices continue to rise. Coupled with the lagging housing market and continuing credit market woes, U.S. consumers are feeling the pinch. The weak U.S. dollar isn't helping either.
The never-patient market, however, is already pricing in another rate cut as demonstrated by the federal-funds futures market. The probability of the FOMC holding rates steady declined from 20% to 10%, and the chance of a 50 basis point rate cut more than doubled to 24% by the close of business on the day of Bernanke's remarks. The probability of a 25 basis point cut was 55%.
Stocks reacted favorably to Bernanke's remarks, as most investors saw a sign of upcoming rate cuts. Beleaguered financial stocks rallied as the two largest U.S. banks, Citigroup, Inc. (NYSE: C) and Bank of America, Corp. (NYSE: BAC), both showed gains. Mortgage lenders Wells Fargo (NYSE: WFC) and Countrywide (NYSE: CFC) also rose.
Global markets also reacted favorably to the possibility of another rate cut, as Barclays (LON: BARC), Royal Bank of Scotland (LON: RBS), and HBOS (LON: HBOS) all showed gains. HSBC (LON: HSBA) gains were more modest as Moody's downgraded their rating from positive to stable.
Two of the economic indicators Bernanke was waiting for, personal income and spending numbers, were released Friday. Both only increased 0.2%, adding to the case for further rate cuts. Peter Kretzmer, a senior economist at Bank of America Corp. in New York, told Bloomberg, "Consumer spending is off to a pretty weak start for the fourth quarter. This helps confirm what is built into the market by now: that the Fed is likely to move on interest rates next month."
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