For the markets, rate cuts are like a drug. They can inspire euphoria, but can also induce dependency. Markets, like addicts, need bigger and bigger doses to get the same effect.
This has framed the market’s prognosis for the Federal Reserve, which today meets to decide on monetary policy. When it cut by 50 basis points in September, it sparked a huge rally. But cutting by only 25bp in October prompted a relapse, as US stocks fell and credit tightened once more.
With Fed governors admitting that the liquidity squeeze had intensified and traders betting on a recession, markets decided that another 50bp cut must be forthcoming. That sparked the latest rally. But that speculation is dimming: futures are pricing a cut of 25bp not 50bp.
为什么呢?各国央行上周听起来还很强硬。英国央行(Bank of England)降低了利率，但发出了通胀警告。按兵不动的欧洲央行(European Central Bank)听起来更像要加息，而不是降息。
Why? Central banks sounded hawkish last week. The Bank of England cut the bank rate but warned on inflation, and the European Central Bank, which was on hold, sounded closer to raising rates than cutting them.
Most important, however, is employment data. The Fed is mandated to pursue full employment, so bad jobs numbers provide great cover for a big rate cut.
Last Friday’s non-farm payrolls did not provide it. The number employed rose by 94,000, compared with forecasts of 80,000. This data refuses to slip into recession territory. The household survey, compiled by polling households rather than companies, even shows jobs growth picking up slightly.
美联储可以依据这个数据做出诊断吗?追踪企业税项拨备的公司警告称，这种就业增长似乎已经停止。 Can the Fed rest its diagnosis on this data? Firms tracking the money companies withhold for tax purposes warn that job growth seems to have stopped.
But the Fed does not want to induce a dependency culture in the markets, and it does not want to signal that it is scared of a recession. A 25bp cut in the Fed Funds rate, possibly with a steeper cut to the higher discount rate, at which it lends to banks, looks the most likely prescription.