The Next Stop: The Federal Reserve

With Congress unable to pass the $700 billion bailout, it is likely that the next stop in the race to quell the market chaos will be the Federal Reserve. Expectations are rising that the Federal Open Market Committee could cut its benchmark lending rate at its October 29 meeting, while some are predicting it could institute an emergency rate-cut as soon as next week. Interest rate futures listed on the Chicago Board of Trade are pricing in a 50% chance that the Fed will slash its key rate to 1.5% in October; on Friday, they were pricing in a 32% chance.

Revising Down Estimates for 2009

With no bailout in place, economists are predicting weaker economic growth throughout next year. “Assuming credit creation falters, it will be harder to call a bottom in the housing market in mid-2009 and will make it difficult for consumers to recover from the substantial headwinds they are facing,” a Merrill Lynch economist, Sheryl King, wrote to clients yesterday. “The result could be a prolonged period of weak growth as the deleveraging process continues unabated.”

Default Rates To Rise

Standard & Poor’s estimated earlier this month that default rates could jump to 23.2% between now and 2010, affecting 353 nonfinancial companies. This would be the worst default rate on record since 1981, the rating agency said. The estimate could now increase, with no relief in sight for the tight credit conditions. “Without some way to lower the amount on non-performing assets on bank balance sheets, the outlook for credit creation, and the economy, is quite dim,” Ms. King wrote.