Fed Set To Cut; Will They Save Their Bullets?
A: We are about an hour and a half from the fed's next rate cut. The question is not whether they will cut, but by how much. This horse agrees 100% with BR over at The Big Picture, which shouldn't be a surprise to anyone here, that they need to exercise restraint and cut only by 1/2 point; limiting the negative effects on the US dollar & commodity prices while acting nonetheless. By saving their bullets now, they will have more ammo to use as the economy weakens, housing continues to be a drag, and credit markets correct themselves.
Unfortunately, I do not think 1/2 point will be the move. I think they will cut 75 or 100 bps this afternoon as a 'shock & awe' offensive to limit the severity of the slowdown and give the markets what they want. I must admit in hindsight, Ben & company handled the Bear bailout wonderfully as they orchestrated an orderly liquidation and averted a complete financial meltdown. Putting my feelings aside of letting the free markets punish those that are weak and the vultures jumping in to grab whats left, the fed's actions avoided chaos that could have played out as a domino effect of Bear Stearns announcing bankruptcy. The move to bail out BSC does NOT fix the housing problem, it does not fix the expectation for rising unemployment & inflation, and it does not fix the expectation of weakening economic data resulting from the credit storm; hence the rate cut move that will come today.
On February 29th I published a post titled, "Credit Check: Running Out Of Bullets", where I stated:
"With future rate cuts likely resulting in further commodity inflation, I'm concerned that we are going to be running out of bullets soon and will have to deal with a period of financial stress without the fed's strongest weapon available to us."That was over two weeks ago. Two days ago, Bloomberg published their version of what I was discussing in their article, "Bernanke May Run Low on 'Ammunition' for Loans, Rates":
Federal Reserve Chairman Ben S. Bernanke may be running out of room to pump money into the financial markets and cut interest rates to rescue the economy.Barry Ritholtz discussed today on CNBC his feelings on the issue and is in the same camp that I consider myself a part of:
The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. The central bank has cut short-term rates by 2.25 percentage points since September and will probably reduce them again tomorrow.
"They're using up their ammunition on the liquidity and overnight interest-rate fronts," said Lou Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other financial institutions.
"I believe that the FOMC should "man up," show some backbone -- cut rates by "only" 50 bps. They might find out what its like not to be at the Market's beck and call (girl). That should stabilize the greenback, and perhaps send food and energy prices lower (earning Ben the appreciation of consumers through out the country)."But I do not think it will play out this way; time will tell. In meantime, I urge you to maintain a clear head as you interpret the events that result from this credit storm. Bear market rallies are always sharp and filled with glimmers of hope; I believe this rally to be no different. Time will heal what ails us and it's clear the fed will take every step necessary to limit the severity of the recession and the pains of the de-leveraging process. Yesterday a bear was shot & killed but not before many innocent employees got their retirement plans wiped out. Whats next?
The unknown continues to be:
a) who holds what toxic assets
b) who is experiencing a liquidity crisis similar to Bear
c) when will foreclosures / defaults reverse course
d) when will credit markets normalize; credit spreads continue to narrow
e) effect on global markets
f) pipeline inflation
g) spread to higher quality / other debt classes
h) severity of job losses to come
i) severity of economic weakness
j) effect on local state budgets
k) spread to other markets (ars, muni's, etc)
l) effect on main street
Steps are being taken, but we are not out of the woods. This is not a daily fix, it is a quarterly to yearly fix rooted by housing that will take time to play out! We went from years of credit fueled leveraged bets to a complete STOP in a matter of months; we have been at this STANDSTILL since mid-to-late 2007 and we are yet to see the economic effects of this. The good news is, we must go through this to get out of it, so in my opinion and as I said over 6 months ago, BRING ON THE RECESSION!
PHOTO: Source
Posted by colgin
Tue Mar 18th, 2008 01:05 PM
Well, I think the Fed should actually be increasing interest rates to, among other things, support the dollar and fight inflation, but we all know that ain't happening. I do agree with you and Barry that the Fed will be totally irresponsible and go completely overboard with a 75 or 100 basis point cut.
So, as high as it has already flown, I bought more Gold yesterday. As much as I have accumulated over the past few years, I wish I had done more since events, and the Fed's reaction to them, have unfolded pretty much as I expected. Next time I will have to have greater courage in my convictions.
Posted by Noah
Tue Mar 18th, 2008 01:09 PM
colgin - I completely can relate to your statement, "Next time I will have to have greater courage in my convictions."
When the fed started cutting, I wanted to buy gold but I honestly didnt think the credit crisis would be this bad. I thought we would have a few rate cuts because I didnt expect the fed to totally diss the weak dollar and ignore commodity prices. I was wrong. When it was clear the fed was favoring the slowdown, I started buying gold, but it was well higher at that point.
I still got in a great level, but couldnt have got in much lower. Oh well, all learning experiences for next time around! When fed says they are done, Im OUT of my gold! i think its a currency trade at this point.
Posted by Beth
Tue Mar 18th, 2008 01:38 PM
Couldn't agree with you more. Bernake is in a tough spot, cleaning up the mess exacerbated by his predecessor.
In a new book by Charles Morris - The Trillion Dollar Meltdown - the author states that because banks and investment banks "now account for half of all credit, their accelerated deleveraging is likely to make the credit contraction much worse than in past cycles." And that we're only beginning to feel the impact of hedge funds, the next shoe to drop.
http://www.cfo.com/article.cfm/10870130/c_10873808?f=home_todayinfinance
Posted by Noah
Tue Mar 18th, 2008 01:56 PM
Hey Beth. Would love to see you do a piece on what you said in the last comment thread:
"karim, the Fed isn't using taxpayer money to 'bail out' Bear. It arranged for one of its member banks, JPMorganChase, to borrow from it's discount window.
A common misconception is that the Fed operates on taxpayer money; it doesn't. It earns a spread from is activity in issuing Treasurys, from the interest it charges banks that borrow from the discount window and from other payment-related activities (i.e. Fedwire). "
Can you do a post entirely describing exactly what bailouts like this means and does NOT mean?
Posted by Noah
Tue Mar 18th, 2008 02:21 PM
3/4 pt FFR
3/4 pt Discount Window
Fed statement sounds MORE CAUTIOUS about growth than before. Risks to inflation raised. Two fed governors wanted smaller cut; plosser & fisher. Sets up for more cuts down the road.
Posted by Wes
Tue Mar 18th, 2008 04:57 PM
Hey Noah, I would love your thought on where mortgage rates are headed. I am closing on a new construction condo sometime end of summer/early fall. I want to know if I should do a long term lock now or ride it out....
I would feel foolish if I lock in now and watch rates plummet. Although I would feel equally foolish if they went up a point while I sat and did nothing....
Posted by Noah
Tue Mar 18th, 2008 05:12 PM
you know, I have a feeling the fed's TSLF and other lending facilities will help narrow mortgage spreads over the coming months.
However, its the unknown in the credit markets that can ruin this! I can't tell you what that unknown is or when it may come, if at all! If none comes, I think the fed's actions will help ease credit market distress. Im scared to tell you anything further than that.