Wednesday, October 22, 2008

Fed move signals possible 50 point cut next week

From the Financial Post:

The U.S. Federal Reserve’s decision on Wednesday to alter the formula it uses to determine the interest rate paid to depositary institutions on excess balances may signal another 50 basis point rate cut next week, according to Scotia Capital.

“The Fed will pay interest on excess reserves at the funds target less 35 bps, whereas before they were paying target less 75 bps,” fixed income research strategist Roger Quick said in an internal e-mail.

The Fed funds target is at 1.50%, already 50 bps lower than when it started this program, he added. So if it cuts to 1.0%, the Fed would only have been paying 25 bps on excess reserves.

“That in turn would have led to excess reserves flooding back out into money markets, and the Fed would have lost control over its target all over again,” Scotia economists Derek Holt and Karen Cordes told clients....MORE