Fed to Cut Rates to Zero on Deflation Risk, JPMorgan Predicts

The U.S. Federal Reserve will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase & Co.

The Fed will lower borrowing costs by 50 basis points at each of the next two policy meetings on Dec. 16 and Jan. 28, JPMorgan economist Michael Feroli wrote in a note to investors yesterday. The central bank will hold rates at zero for the rest of 2009 to prevent prices from spiraling down as companies cut jobs and banks reduce lending, stifling spending, Feroli said.

The Fed may not be the only central bank to begin offering free money to jolt life into their recessionary economies and keep prices rising as the 15-month credit crisis deepens. The Bank of Japan cut its benchmark rate to 0.3 percent last month, and the European Central Bank has signaled it’s ready to lower rates further after two reductions in the past six weeks.

U.S. consumer prices plunged 1 percent last month, the most since Labor Department records began in 1947, the government said yesterday. Some Fed members indicated a willingness to cut rates to spur growth and keep prices from falling, according to minutes from the last Federal Open Market Committee meeting that were released hours after the price report.

Taking the target rate to zero percent would not be costless for the Fed,'' Feroli said. Public confidence may dropif there is a perception that the Fed has `run out of ammo.’’’

Anyone want to bet on this? I think if deflation is a serious risk, it might be profitable to long long-dated Treasuries instead of shorting them. If I have a longer time horizon, I would short them.

Apparently China and Japan keeps on buying Treasuries.

bloomberg.com/apps/news?pid=20601087&sid=aFQwLGTYEM3Y&refer=home

China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1 percent that month.

Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

I suppose when the Chinese stop buying treasuries in massive amounts, it would be an excellent idea of shorting them. I also heard the that US might lose its AAA rating.

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