What are the FED thinking?

By now, it looks like the Fed will cut key interest rate by 50 basis point in the coming days, effectively a week after a 75bp rate reduction. Now, there is nothing wrong with a rate cut, but 125 bp total reduction in two weeks is going way too far and is absurd. The magnitude is mind-boggling and speaks volume about the FED’s obsession with asset valuation (namely equity) AND its hidden desire for uninterrupted (i.e. linear) economic progress. A 125 bp reduction denotes a CRISIS. Yes, the U.S. economy is soften and will likely hit a recession. But its a far cry from being a crisis. Indeed, a mild recession (which most people, even the bears (myself), would agree that it will be a soft one) would be healthy for the economy. There is absolutely ZERO, NADA shred of proof that the economy is in crisis mode. Most companies who talked about seeing “recessionary-like” activities made qualifying statements indicating its a “soft” environment, not a disaster. Interestingly, ATA tonnage data (very good macro indicator/predicator) indicates that the worse was behind us with decent November and December tonnage data. Things are not “peachy” out there but its certainly not all gloom and doom like the FED makes it out to be. A 75bp reduction (though a bit on the extreme side) is more than enough. If anyone hasn’t noticed, the Asset Back Commercial Paper market is coming back with much narrow spread. Things are becoming more orderly in the financial markets. Do we really need an additional 50 bp? What is the rationale behind another 50bp reduction? Who gives a rat-ass about the frothy Asian equity market? Will lower mortgage rates make all the NPLs disappear from the bank’s P&L? I dont think so. I just dont get it. Maybe I am missing something. It simply doesn’t add up.

Ben has borrowed a lot on his home equity line. It’s costing him plenty.

I like the movie The Money Pit. That’s my response.

This is just the beginning of rate cuts (well maybe the middle)… Fed Funds Futures projecting rates to be around 2%/2.5% come the end of 2008.

Here comes the dollar as a carry currency!

Actually, on a personal level I think it’s great! Just waiting for another 50 bps and I’ll change my home equity from variable to a lower fixed. YAHOO!

lunacy is not meant to be interpreted by the sane.

From CNN/Money “NEW YORK (CNNMoney.com) – Stocks surged Monday, as investors took the morning’s weak new home sales report and mixed earnings news as further evidence that the Federal Reserve will keep cutting interest rates.” So, the good news is that there’s badnews! We’re having a recession, so we’ll get to borrow stuff cheap after all! Gosh, I feel so much saner now… and for a double mind-bleep… I get to hear the Prez tell me how the State of the Union is.

I’ll take the other side here. We all have to assume three things: 1. Ben is smarter than you and me 2. Ben knows more than you and me 3. Ben has access to more information/insiders than you and me So as we critique his performance from the sidelines, can you imagine stepping into his shoes, interpreting the data that he is, listening to heads and CIOs of IB, HFs, CBs, having to make sure the markets don’t crash, etc. AND, he is prisoner to the fed funds futures rate, because if he disaapoints, we will crash. What would you honestly do here? Realistically, what would you do?

I would fear a world led by Mr. Bernanke and his wackiness. But up north this land will soon be run by the Mike “the man” Carney. boooyah!

bchadwick Wrote: ------------------------------------------------------- > Here comes the dollar as a carry currency! Very good and relevant point. In a sense it already is a carry trade when you consider the massive level of debt the US hold both public and private.

> We all have to assume three things: > 1. Ben is smarter than you and me > 2. Ben knows more than you and me > 3. Ben has access to more information/insiders > than you and me > Very smart people have been known to do very dumb things in state of distress. I was in the pro-Ben camp before the latest announcement, but if he cut rates tomorrow, I will find it hard to believe that this guy is the right man for the job. What I am seeing is some newbie hitting the Panic button at the first sight of trouble. Quite frankly, its pathetic. “listening to heads and CIOs of IB, HFs, CBs, having to make sure the markets don’t crash.” All the commentaries from CEO (for example, we had Black & Decker this week) have denoted a soft environment. I would like to know one prominent individual (ex-Cramer) who has described this current market conditions as dreadful. There is none. We’re not going into a depression, for pete sake. The Credit market is essentially back to norm now with that 75 bp cut (50 bp reduction with accommodating commentaries would have done the job). I am not saying that we DON’T need a rate cut but do we really need all of that 125 bp? If I were him, 50 bp reduction with a lot of accommodating remarks. If things do get dreadful, I still have some ammunition left. With that 125bp cut, how many more rate cut is possible? Side note:Durables Good Orders number were pretty good. Again, another data point indicating that we are far, far away from a dooms day scenario. At worse, we’re looking at a very mild recession.

negativefcf Wrote: ------------------------------------------------------- >I would like to know one prominent > individual (ex-Cramer) who has described this > current market conditions as dreadful. There is > none. We’re not going into a depression, for pete > sake. The Credit market is essentially back to > norm now with that 75 bp cut (50 bp reduction with > accommodating commentaries would have done the > job). I am not saying that we DON’T need a rate > cut but do we really need all of that 125 bp? If I > were him, 50 bp reduction with a lot of > accommodating remarks. If things do get dreadful, > I still have some ammunition left. With that 125bp > cut, how many more rate cut is possible? Many, many prominent market commentators and participants have made comments that the credit markets are the worst its been since 1929. In fact, individuals need not make a comment on the current market conditions, just take a look at the stock prices of the banks, i.e., bofa, CFC, C, WAMU, etc. Add that to a derivative marketplace of over $500 trillion dollars (CDS defaults could equal subprime losses if corporate defaults rise to historical NORMS, not to mention, what about interest rate swaps should rates spike?). I agree with wanting to keep some powder dry, but we are not in a typical slowdown, in fact, this scene is setting a precedent as the greatest credit bubble of all time starts to deflate before our eyes. PS - the most important point I can make. The fact is that the Fed as a whole has lost control, and central bankers as a whole have lost control. At least, they have lost their grasp. It does not really matter what Ben and his CB friends do, because they have lost control on the money supply. The money is controlled by others (shadows) now.

In 1987, Greenspan cut rate by 50 bp. When LTCM crisis occurred, the Fed cut rates twice (25 bp, 25bp) and that was all that needed to be done. Both were extreme crisis: equity and credit market respectively. During the massive tech bubble, Greenspan aggressively cut rate (though gradually) but he didn’t go crazy like Bernanke has. On Wednesday, Bernanke will cut an additional 50bp for a total of 125bp in a matter of days. After the 75bp reduction, the credit market has gotten better. Do we need the additional 50bp right now? Again, I am not arguing against a rate cut, I am arguing against the logic of a 125bp in a short time span. If he really wanted to help “alleviate the credit” market, he would have been smart and been more aggressive in early fall. Credit markets in Q4 and Q1 have NOT materially change since early fall. Why now? Why 125bp? I think its a foregone conclusion that Bernanke saw the equity market dropped 10% midway through January and panicked.

Bernanke COMPLETELY PANICKED last week! Bernanke is turning into Arthur Burns with a beard. He’s obviously better at analyzing and writing about PAST economic conditions and Fed decisions, than actually making the decisions. It’s kind of like spending your entire adult life playing Microsoft Flight Simulator, then one day being asked to fly a real plane across the Atlantic and hitting a major storm when you get over water and crying, “This part of was never in the game I played!” Won’t be surprised to see some “no” votes tomorrow by governors looking to position themselves as his replacement when his helicopter runs out of easy money. The era of negative real interest rates…unbelievable.