Fed Acts! Cuts By 1/2 Point!
A: The fed decided to GO VERY AGGRESSIVE and cut the target rate by 1/2 point PLUS the discount window by 1/2 point! Holy cow! Quite a surprise and stocks are obviously rallying big time on this news! With such a move, I question how bad this credit mess really is on effecting the US economy and continuing the housing downturn!
Wow! This was my least likely of options as we all learned a bit about Ben Bernanke today! Here are side effects:
1. YIELD CURVE STEEPENS - Short term bond yields fall & long term yields rise!
2. STOCKS RALLY - Stocks get what they wanted!
3. US DOLLAR FALLS - Dollar index under pressure
4. OIL HITS NEW INTRADAY HIGH - Not a surprise with such a stimulative move
5. LOWER HELOC RATES - Expect Prime rate (tied to HELOC's) to fall for first time since last July. Expect lending rates to fall as well with this move.
The accompanying statement mentions the "return of inflation concerns" and it appears that this VERY AGGRESSIVE MOVE IS A TWO AND THROUGH MOVE! I'll have to fully read the statement to discuss that likelihood more.
Some excerpts from the fed (read the full FOMC statement here):
Notice the preventative nature of these statements; recall my "Expect A Preventative Rate Cut" post? Basically the fed decided to do its actions NOW and STOP the markets from pricing in future moves! The markets love this with a huge stock rally but how they feel about it when things settle down and they realize that future cuts seem unlikely is yet to be seen!
Inflation hawks are going to be criticizing this move BIG TIME; including me. Was 1/2 point on the fed funds rate needed? The fact that they did makes me worry a bit about short to medium term economic impact. WOW!
Posted by guest
Tue Sep 18th, 2007 02:31 PM
This is very aggressive. I hope you're right that this is "two and through", otherwise what's happening is that you and I are effectively being taxed (in the form of depreciating dollar assets) to bail out hedge funds, Wall St and irresponsible lenders/borrowers.
Posted by Colgin
Tue Sep 18th, 2007 02:32 PM
Nothing personal, but was there ever any doubt what the Fed would do here. The Fed doesn't give a damn about the dollar, infation or moral hazard. As Bill Fleckenstein says routinely they care about the applause meter, which means the clapping of Wall Street plutocrats to whose rescue they come running with dollars in hand.
FWIW, I think there will eventually be hell to pay for this move.
Posted by Noah
Tue Sep 18th, 2007 02:36 PM
Yes there was doubt in this move! I dont think 1/2 pt on fed target rate was needed! The fact that they did it makes me real concerned how bad it is out there in these ivy leaguers minds.
I thought Ben would do it slowly. Obviously they know it takes time for this cut to funnel through economic system and that by the time it does it would have been needed.
Just cant believe it but I am glad I covered my shorts this morning.
Posted by Mike
Tue Sep 18th, 2007 02:45 PM
The only problem I see here is with Euro at 1.3962 (which will break 1.40 by tomorrow) we will see $85 oil by end of week, $90 oil by end of year, and $100 oil thereafter. Remember, oil is priced in dollars so weak dollar = higher oil.
Posted by Noah
Tue Sep 18th, 2007 02:48 PM
Markets certainly got their way, no doubt about that. I just dont know how this is good for longer term.
Mike you hit the nail on the coffin. Might as well burn your dollars before they are really worth nothing
Posted by Noah
Tue Sep 18th, 2007 02:59 PM
Cant stop talking - This has got to be a total prevention cut! I mean with stocks 4% off record highs, oil at record highs, commodites at very high levels, and US dollar at weakest since 6 years, what other justification is there for this move?
My 6-10 month expectations for the US economy just became very sour. Is this thinking right? Or am I way off here?
Posted by Steve
Tue Sep 18th, 2007 03:00 PM
This is a strong statement by the Fed. This is also a win win for holders of Manhattan real estate. Why? it's called inflation and Wall Street. With this action(Discount and Fed Funds 50 basis reduction) the Fed will be pumping a large amount of money into the economy...too much money chasing too few goods...we all know what that means. Anyhow let's hope this was the stimulus needed to ignite Wall street and business transactions. MHO
Posted by jw
Tue Sep 18th, 2007 03:02 PM
nice cover on your shorts! do you plan on using the boost from today (and any follow through) to re-establish any shorts? after all, 50bp and another 25bp priced in already doesn't scream healthy economy....
Posted by Noah
Tue Sep 18th, 2007 03:10 PM
Steve - ignite Wall street? From what? We were less than 4% off record highs? Talk about bailout. There are more pressing macro economic fundamentals here that has nothing to do with wall street and business transactions.
But hey, thats just my opinion and I'll always respect others'.
JW - Not sure. I was 70% long, 20% short, and 10% cash for the monies I had in brokerage accounts. I only have about 40% of my monies in brokerage accounts though. I think Ill stand pat as I was short some big caps, SPY, QQQ's indexes.
I'm thinking, what is underneath or what threats does the fed see to warrant such an aggressive move? I know everyone is tied up with stock rallies, but is this a good thing for down the road?
Posted by Mike
Tue Sep 18th, 2007 03:11 PM
What you forget is that a strong economy = strong dollar so while the cut today (which whoose effects you do not see for 6mnths - 1 year) might be dollar weakening oil and commodity rising, over time, the dollar will come back as the US economy strengthens by net effect of cheaper liquidity.
This is, however, great news for NYC real estate. It will help save bonuses and with the weaker dollar you will see massive continued international money flow to NYC housing.
Posted by Noah
Tue Sep 18th, 2007 03:15 PM
Great point Mike. Yes, great news for NYC real estate as if wall street stays strong, jobs and bonuses should be fine. Plus, lets see how lending rates are effected by this and if that provides for more buying power to buyers here. It certainly adds confidence to see wall street crawl near highs, lets see if it lasts.
I think this is purely a preventative move to guard against a slowdown 6-10 months down the road and cushion it if it does occur!
I also worry that at what point rising oil and commodities starts to SLOW ECONOMIC GROWTH? I know they are side effects of strong demand and fast growing economies, but at what point does it start to negatively impact us?
Posted by newbie
Tue Sep 18th, 2007 03:17 PM
Funny thing, by reading the media it seems everyone's in favor of a rate cut. Now that the Fed cut rates some people are disapponted.....you can't please everyone.
Rate cuts are a zero-sum game - one person's gain is another's loss. The Fed does what it believes it has to do for the economy, weighing the pros & cons. There is no black & white approach to a gray situation.
Posted by anon
Tue Sep 18th, 2007 03:35 PM
The interesting thing here is that a cut by the Fed could even exacerbate the own/rent equation further. How? Well, by cutting aggressively, the Fed is essentially willing to sacrifice the dollar. A weaker dollar will continue to attract foreign buyers to NYC (mostly Manhattan). Manhattan, and even areas outside of Manhattan, will be owned by what are effectively foreign landlords, whose purchase decisions aren't based on rents but who may just want pied-a-terres or be making investments. SO, you have a further detachment between prices and local incomes, and therefore between prices and rents. A rational decision at that point, remarkably, would be for locally-based owners to sell their apts to foreign buyers and rent back, capturing that arbitrage.
Posted by guest
Tue Sep 18th, 2007 04:24 PM
This is as if, at the end of the party at 3am, drunk and sloppy, we find one last bottle of scotch.
Posted by Noah
Tue Sep 18th, 2007 04:28 PM
That last bottle of scotch should make us happy until 5AM at least!
Posted by Heather
Tue Sep 18th, 2007 07:25 PM
Awesome blog. I trade, although have zero interest in RE, your comments are spot on! Poor Ben, inflation will be on everyone's lips in the near future. Did he cave bigtime to Hank & George (I can just hear it, come on Ben, not .25, .50!) or was it the last line in the sand. I think the Fed has given the last hurrah in one shot to prep for the coming hard landing.
Posted by Bobby
Tue Sep 18th, 2007 07:59 PM
Congratulations, Noah, both for that NY Mag mention and for being correct about the Feds cutting interest rates.
I was wrong. I now wish that the dollar will sink like a stone to punish the Fed for such a wrong move.
Posted by Noah
Tue Sep 18th, 2007 08:23 PM
Heather - Thanks! What do you trade? Welcome to the blog.
Bobby - Thanks too, but to be honest I expected 1/4 pt on target rates and 1/2 pt on discount window. I really didnt expect the 1/2 pt cut on target rate and thought no cut was more likely than the 1/2 cut.
Anyway, Im not the only one surprised by todays move and this is a new fed that we did learn more about! Makes me worry about why they were so aggressive though
Posted by Daren Sukyerdick
Wed Sep 19th, 2007 11:50 AM
This guy is same shit as Greenspan, first Greenspan created the bubble, then this guy now will maintain the bubble.
Hey, the FED is indeed a private entity and all big investment banks have ownership shares in it, so it will always hurt the public and protect the big sharks