Federal Reserve Expected to Cut Rates to Near Zero

The Federal Reserve is expected to cut interest rates to close to zero on Tuesday and may point to further unconventional steps to battle a year-old recession.

Economists expect the US central bank to lower its target for benchmark overnight rates by at least a half-percentage point to 0.5 percent and clearly state it will deploy so-called quantitative easing measures to restore growth.

The Fed on Monday said US industrial production fell 0.6 percent in November, with manufacturing output shrinking 1.4 percent to put it 7.3 percent below its year-ago level. A separate index of manufacturing activity in New York state hit a record low in December.

The data offered a fresh sign that an already year-old U.S. recession is deepening, and underscores the case for aggressive and unconventional actions by the central bank's policy-setting Federal Open Market Committee.

Some economists expect US output to shrink at a 6 percent annual pace or more in the fourth quarter.

"Since there is precious little room between current target rates and zero, it will be more interesting to see if the FOMC statement begins to lay out any additional steps that might be undertaken in the new quantitative easing regime," said Max Bublitz, chief strategist at SCM Advisors in San Francisco.

Quantitative easing, which recalls the emergency steps taken by Japan to expand the supply and circulation of money to end a deflationary decade of stagnation in the 1990s, was discussed by Fed Chairman Ben Bernanke in a speech on Dec. 1.

"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth," the Fed chief said.

Bernanke said the Fed could directly intervene in markets to stimulate the economy, saying it could purchase U.S. government bonds to drive down yields or private sector debt to narrow spreads and lower borrowing costs.

With yields on U.S. Treasury debt already very low, economists say the Fed may get better results by aiming at mortgage-backed securities. Increasing demand for these bonds should help to reduce mortgage rates, spurring demand for homes and hopefully halting the slide in housing prices.

The housing collapse has led to the worst financial crisis since the Great Depression and tipped the U.S. economy into recession last December. The downturn is already the longest since the 1980s, and economists hold out little hope for an upturn before mid-2009.

The Fed has already reduced the overnight federal funds rate 4.25 percentage points to 1 percent since September 2007.

It also has engaged in a degree of quantitative easing by pumping over $1 trillion into financial markets through a range of emergency liquidity facilities that it decided not to immediately sterilize, or withdraw, via daily operations.

This decision has seen the size of the Fed's balance sheet almost double from a year ago to $2.2 trillion.

Sterilization of Fed cash injections is normal practice to prevent excess money supply growth from stoking inflation, but that seems a like a distant problem at the moment.

In fact, some economists predict that the United States could suffer a deflationary period of its own in 2009, as tumbling oil and commodity prices, alongside increasing slack in the economy, deliver a sustained fall in general prices.

© 2008 CNBC.com

http://www.cnbc.com/id/28240574

"Buy American"

In these economic times, people go into survival mode and have the mentality of "flight or fight."  Most people opt for "flight" and their fear has immobilized them to the point where rational thinking goes out the door.  It's completely understandable because these hardships are very real and resonant into the lives of all Americans.  In the midst of all this chaos, one man has come forward as the voice of reason.  Warren Buffet is a master.  He has made billions during the 1980's when the US was in one of it's worst recessions in history.  When Warren Buffet speaks, we should all listen.  Here is what he has to say:

October 17, 2008

Buy American. I Am.

By WARREN E. BUFFETT

 

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."

I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: "Put your mouth where your money was." Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.