JPMorgan: Expect Fed to Cut to 0% in January

by: John Jansen November 20, 2008    

John Jansen

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JPMorgan economists are predicting that the Fed will reduce rates by 50 basis points at each of the next two meetings. That would bring the target to zero. Here is the note from JPM:

We now look for a 50bp cut in the target fed funds rate at the December 16 meeting, followed by an additional 50bp cut at the January 28 meeting.  We believe the Fed then continues to conduct a zero-interest rate policy (ZIRP) for the remainder of 2009.  The change in our call is motivated in large part by the risk that deflation becomes more likely in an environment where labor market slack is building, and ongoing financial tightening is delaying the prospect that slack begins to get worked down.

Taking the target rate to 0% would not be costless for the Fed. One concern that has been voiced in the past relates to the effect on money market mutual funds.  We do not think this cost is enough to constrain the Fed, in part because facilities such as the Money Market Investor Funding Facility (MMIFF) should help to provide a more orderly transition for this market.  Another cost that has been mentioned is the loss of public confidence if there is a perception that the Fed has “run out of ammo.”  We don’t believe going to ZIRP implies that the Fed cannot do more, and we would expect the Fed’s leadership to communicate that even a central bank operating at ZIRP still has many tools at its disposal. 

Along these lines it becomes natural to ask if quantitative easing (QE) follows ZIRP.  While there is no standard accepted definition of QE, an increasing number of Fed speakers have expressed the view that the recent increase in the Fed’s balance sheet constitutes QE, a view we share.  Normally, one would expect ZIRP to precede QE, but because of the flexibility created by interest on reserves, in the current case QE can actually precede ZIRP.  While QE has been ongoing for the past two months, it could potentially turn more aggressive by monetizing fiscal stimulus or buying GSE obligations. Before ramping up QE, the path of least resistance may be for the Fed to first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period.

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This article has 14 comments:

  •  
    Nov 20 07:25 AM
    A combination of the terms JPM and economists is, in itself, an oxymoron.
    Reply | Link to Comment
  •  
    Nov 20 07:34 AM
    As the effective rate is now 0.3% would that mean after the Fed lowers to 0% the effective rate will be -0.3%? They'll pay me to borrow their fiat currency? What a deal!
    Reply | Link to Comment
  •  
    Nov 20 09:38 AM
    The economic issue is nolonger predicated on the FED easing.
    At this stage we require a combination of approaches in one package.
    Fed should lower the FF to zero immiediately.
    Effective allocation of the 350 billion dollars left in TARP should continue -that includes the 25 billion dollars for the auto industry.
    In addition ,the SEC should reimpose the restriction on establishing the short positions (stocks).
    The implemented measures will work ,but some time is needed.
    To allow speculators to exacerbate intermiitent psychological risks is to negate the measures in place thatb are potential jet fuel for the economy.
    Reply | Link to Comment
  •  
    Nov 20 09:46 AM
    Dear God, I can't even bear to think of the hyperinflation that's going to show up once we get out of this mess. A ZIRP, in addition to the hundreds of billions that have already been squandered and the billions more that will be wasted?

    Say hello to the Weimar Dollar. And to think, we used laugh at Zimbabwean currency problems. Maybe Mugabe will be the one with the last laugh...
    Reply | Link to Comment
  •  
    Nov 20 10:30 AM
    I don't think we have to worry about inflation too much at the moment. People are talking about defaltion now. Also inflation is really probably the most painless way to finally resolve the housing crisis. If we have inflation, houses can be worth less without the actual book value of the house going down. This would allow everyone to lose money without all of the catastrophic faliures that are currently upsetting the markets. It would allow the prices of the homes to adjust downward, without puting all of the owners underwater. This many people underwater state will prolong the recession, as further failures, etc. will continue to occur. Inflation will help to solve this problem. Thus Bernanke doesn't really have to worry about inflation at the moment. Inflation is his friend.
    Reply | Link to Comment
  •  
    Nov 20 10:59 AM
    I will repeat this for the morons on this website: THERE IS NO DEFLATION!!! Yes, there is DELEVERAGING, but NO DEFLATION!!!

    Deflation = decrease in money supply. Well folks, that ain't happenin'.
    Reply | Link to Comment
  •  
    Nov 20 11:20 AM
    Unlike Japan, the US can't do much quantitative easing because it already has a skyrocketing deficit (meaning we basically quantitative eased our way along for 20 years and now are really in bad shape). Plus lowering the rate isn't doing much for bond rates since the Fed must sell the bonds and about no foreign investor will say sure, we'll tie our money up with US bonds for 1-2% interest for any significant amount of time.
    Reply | Link to Comment
  •  
    Nov 20 11:34 AM
    How about 2.5% 30-year fixed mortgages? That would get the fence sitters out making deals this weekend. Inventory would drop like a rock.
    Reply | Link to Comment
  •  
    Nov 20 11:46 AM
    When they open the FED discount window to us mere peons, I'd like to refinance my mortgage at ZIRP rates. Heck, I'd take 500% LTV and put 400% into gold so I can pay my loan back in 5 years with a significant profit remaining.

    LOL. Zero interest. The only correction I can see would be to change the acronym to ZIP, because that's what this plan offers in the way of long term benefits.
    Reply | Link to Comment
  •  
    Nov 20 12:10 PM
    Disgusting. All of this is disgusting. We are now on a way street to a depression to top all depressions. The ignorant masses of American voters have allowed the FedGov to destroy this country, and its currency.

    If the government wished to end this entire mess as quickly and painlessly as possible it would have done nothing. Let the freaking markets ADJUST!

    Let prices come down and stabilize the housing market. Let industries and companies fail. But alas as per usual their policy since the great depression which was caused by their wrongful thinking has led to another much worse depression. The dollar will crash this time.

    How can the government interfere with and delay market adjustment? Lets see...

    *
    (1) Prevent or delay liquidation. Lend money to shaky businesses,
    call on banks to lend further, etc.

    (2) Inflate further. Further inflation blocks the necessary fall in
    prices, thus delaying adjustment and prolonging depression. Fur-
    ther credit expansion creates more malinvestments, which, in their
    turn, will have to be liquidated in some later depression. A gov-
    ernment “easy money” policy prevents the market’s return to the
    necessary higher interest rates.

    (3) Keep wage rates up. Artificial maintenance of wage rates in a
    depression insures permanent mass unemployment. Furthermore,
    in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher.
    In the face of falling business demand, this greatly aggravates the
    unemployment problem.

    (4) Keep prices up. Keeping prices above their free-market levels
    will create unsalable surpluses, and prevent a return to prosperity.

    (5) Stimulate consumption and discourage saving. We have seen
    that more saving and less consumption would speed recovery;
    more consumption and less saving aggravate the shortage of saved-
    capital even further. Government can encourage consumption by
    “food stamp plans” and relief payments. It can discourage savings
    and investment by higher taxes, particularly on the wealthy and
    on corporations and estates. As a matter of fact, any increase of
    taxes and government spending will discourage saving and invest-
    ment and stimulate consumption, since government spending is
    all consumption. Some of the private funds would have been saved
    and invested; all of the government funds are consumed.15 Any
    increase in the relative size of government in the economy, there-
    fore, shifts the societal consumption–investment ratio in favor of
    consumption, and prolongs the depression.

    (6) Subsidize unemployment. Any subsidization of unemployment
    (via unemployment “insurance,” relief, etc.) will prolong unem-
    ployment indefinitely, and delay the shift of workers to the fields
    where jobs are available.

    The Federal Government is well on their way down the expressway of destroying this country, following their great depression inducing policies.

    The best action the government can take is to do nothing! It's the quickest and least painful road to recovery. But what they have done and are doing is going to be SO much more destructive and cause these problems to last soooo much longer.

    *Credit to Murray N. Rothbard
    Reply | Link to Comment
  •  
    Nov 20 01:15 PM
    X86BSD,

    We have been reading the same book "Americas Great Depression"?

    You're going down Keynesians. How many times must you be killed?
    Reply | Link to Comment
  •  
    Nov 20 04:20 PM
    hey Gabe-
    what happened to the first $350B of the TARP you were so emphatic about? Last I heard, it was wasted.

    Buckle your seatbelts, in 24-36 months inflation will be thru the roof. That's a pretty good stimulus for consumption, if anyone still has a job.

    At some point, this spectacle will cause a dollar devaluation and loss of de facto reserve currency status. This will enforce fiscal and monetary responsibility. The IMF may even step in. The US is spending itself into a third world country.
    Reply | Link to Comment
  •  
    Nov 20 10:18 PM
    There are two main components of Money supply: M1 which is currency in the market where you are right on! and M2 which is M1 times the velocity that it is exchanged, The velocity is non existent thus M2 is down, thus deflation. Deflation happens when you put M1 under a mattress. ( i.e. no lending which causes deleverging.)

    On Nov 20 10:59 AM dieuwer wrote:

    > I will repeat this for the morons on this website: THERE IS NO DEFLATION!!!
    > Yes, there is DELEVERAGING, but NO DEFLATION!!!
    >
    > Deflation = decrease in money supply. Well folks, that ain't happenin'.
    Reply | Link to Comment
  •  
    Nov 21 01:05 AM
    I agree with X86BSD...all this is doing is distorting the economy and ultimately
    it will destroy the value of the US dollar...I think that is the plan that is in place
    now...its much easier to let inflation pay current debts, even as the debts grow larger...because the people running the show will be long gone by then.

    To me these 'masters of the universe' in DC are just a bunch of ignorant people
    who have done much to harm this country.
    Reply | Link to Comment
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