Wall Street Expects the Federal Reserve to Cut Rates Tomorrow

The Federal Reserve is expected to cut the benchmark funds rate by an estimated .25 percent tomorrow as the credit market has put stress on the economy.

The Federal Reserve reviews several factors to decide whether or not they will raise, lower, or not change rates. The following will be what the Federal Reserve will be looking at for the meeting tomorrow.

• Interbank Rates - The Interbank is a network of banks that loan money to other banks using short term loans. The rate at which this money is being loaned has risen sharply in the last few weeks as year end funding needs have increased. The Bank of England, one of these banks, has also lowered their rate for the first time in over two years. It’s expected that the Federal Reserve will do the same to lower the spread between that and the Federal funds rate.
• Economy - There are several indicators for how the economy is doing, and all of these will be used in deciding the rate cut. First being unemployment, we have actually had an increase of 94,000 jobs in December which is in line with forecasts. Second being the gross domestic product (GDP) for the third quarter which was up to 4.9 percent, the best in four years. As well as the GDP is doing it’s expected that growth will slow substantially early next year.
• Housing Market - Recent housing data has all been very poor. New home sales in October came in at an annual rate of 728,000 units below market forecasts. Foreclosure rates are at all time highs coming in at 1.68 percent of homes already in foreclosure with another .78 percent possibly going into foreclosure.
• Inflation - The biggest effect of the Federal Reserve lowering interest rates is that it weakens the dollar. Although even with the weakening dollar and rising energy costs inflation concerns remain mild.

To read more about what the fed is facing at Tuesday’s policy meeting head on over to CNBC.