The Fed Flinches

NEW -> Contingent Buyer Assistance Program
I think the Republicans and Wall Street just put Bernanke on the tracks in front of an oncoming freight train.

And, they handed him a toy remote control that has a big red "Stop" button on it which he is pushing frantically.
 
Um... my dollars will be worth less than Canadian acorns at this rate.

So anyone want to speculate on mortgage rates for this year?
 
" So anyone want to speculate on mortgage rates for this year?"

Long-term mortgage rates are a combination of the FED rate, risk perception and inflation. Risk perception is obviously going to increase because the lenders are getting slaughtered. The FED rate is going down, but this is creating inflation which is more than offsetting the lower FED rate. In short, mortgage rates will begin to rise later this year. We may see a short-term drop making for one last chance for people with good credit and plenty of equity to refinance, but after that, rates will rise. I think we will be looking at 6.5% to 7% mortgage rates by the end of 2008, and 8% rates by the end of 2009.
 
And my 2 cents worth on FED policy: after watching the early 80s recession, I never thought I would see the FED let inflation get out of control again. These rate cuts are making me sick. Either nobody remembers the ills of inflation, or the FED is worried about the next Great Depression. I suppose if those are my two choices, I will probably go along with the FEDs new policy of stagflation over depression...
 
That's crazy talk, IR. Are you trying to tell me that Ben was trying to stem a panic rather than just stave off the evils of recession? If that kind of thinking takes hold, any bit of bad news would undo the magic spell Ben is conjuring by tossing the dollar under the bus.

/sarcasm

The rate cut doesn't change anything other than the cost of bank borrowing. While that may benefit the profit/loss statement, it does nothing to change the systemic problems that are causing the sell-off.
 
Actually improving profitability of companies in the financial sector helps minimize the impact of all the bad paper they are holding.
 
I think everyone is missing the point.

The Fed is obv. trying to keep a couple of big banks from colapsing.

Inflaton? Meh. Slay that dragon later. That one's easy compared to the fallout from a major bank failing. And there's so much off balance sheet actitivity nobody really knows where the bodies are hidden (unless you had a hand in hiding them).

Inflation has been artifically low for the past 25 or so years because there was a surplus of cheap labor and a surplus of cheap inputs. Go look at agricultural products. The boom in food prices isn't from increased demand for biofuels - it's from increased demand from 4.5 billion people who are EATING IT.

The fed can run interest rates to 20 percent and it will do zilch to fix worldwide demand for inputs.
 
I am just not terribly worried about inflation right now. I think that despite the rate cuts there is a massive decrease in global liquidity going on right now. The credit crunch is causing debt and equity financing for all types of new investment to disappear. The problem for the Fed is that so much of that is now done outside of the traditional banking role that they don't have that much control of it.
 
No Vas hit on a great point. The fed is made up of some of the best financial minds in America (no matter what we all think otherwise) and they are seeing something a lot bigger then stabilizing markets and avoiding dipping into the "R" pool for a quarter or two....heck, that is a healthy cycle. They are protecting the large banks, investment firms, and hoping to ward off a major collapse.

Think about it, if the majority of the ARM/ Option ARM reset are just now hitting, so the banks will not feel it for another quarter or two...and considering how much bad debt has already been written off, this could be a big problem for the instituions that took on a lot of risk. I'm looking at you Citi.

What would happen if one of the major banks was forced into bankruptcy, or had to be bought up to stay afloat. Now THAT would hurt the US and World economy and how it is percieved. Not good in an election year.

Maybe I should start transferring my $$ back to the Royal Bank of Canada ;)
 
I am not sure where to pack my cash now. I've saving them to buy a place. All of them are with CitiBank. I am thinking of moving them out to a more secure bank but I just don't know which one.
 
M1 is flat as a pancake. There's no massive inflation coming at these rates. We may already be at the point where it's impossible for the Fed to hyperinflate via money market operations because nobody is borrowing. The Fed is a reactive organization anyway. If M1 blows up as a result of this (unlikely), they'll just bump up rates and suck the money out. So far the Fed has been pretty responsible. They've held the money supply roughly flat, which means they're deflating the bubble as fast as they can without causing additional damage.
 
This may turn into the market bounce where shorts are forced to cover. Once that buying pressure is gone, look for the indices to roll over and make new lows. This rate cut will not cause buying by the institutions.
 
Someone on CNBC was saying how it was actually a 300 point rally from 10:30 a.m. EST. That is like saying that the patient is good since they only had to amputate one of his legs.
 
I would look at it that way. The DOW was down over 450 points and rallied more than 300 points. I think traders may consider that fact before trading opens manana. IMO the short covering and institutional buyers who bought early this morning are the ones who fueled the rally and they will start to unwind their positions tomorrow.

The FED only cares about preventing bank failure and more specifically its friends within the bank/brokerage arena. The market was begging for a rate cut an Uncle Ben caved. By the way, did anyone see how Paulson responded to the question about why the proposed economic stimulus seemed so broad and not concentrated on homeowners? Because this administration, the FED and Wall street don't care about anything other than securing the continuation of their orgy.
 
In Private, Bernanke Tells Horror Stories

http://www.usnews.com/blogs/washington-whispers/2008/01/22/in-private-bernanke-tells-horror-stories.html?s_cid=rss:in-private-bernanke-tells-horror-stories.html
 
Why the Fed can't save us:

But now there's a panic in the stock markets, where it's visible for all to see. Last year, 41 of the 100 best-performing stocks were from India, according to Russell Indexes. The Shanghai stock market almost doubled.

This makes no sense unless you consider the Indian and Shanghai markets to have been undiscovered before 2007 - which they weren't. Had the Fed not done anything today, the Dow could easily have fallen 600 or 800 points. Instead, it closed down less than 130.

The problem is that the Fed has only a limited amount of rate-cut ammunition, and expended a lot of it today. It's expected by the markets to cut rates again next week, and will have used up most of its bullets.

Full article: http://money.cnn.com/2008/01/22/magazines/fortune/sloan_irrational.fortune/index.htm
 
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