Historic 100bp Cut From The Fed Today?

After surprising the markets with a 25bp discount rate cut on Sunday and extending the discount rate window to investment banks, the Federal Reserve is set to make another historic move by cutting interest rates 100bp today.

This would be the first time in over 23 years that the central bank has cut interest rates by more than 75bp during the single meeting, reflecting the severity of the current US economic situation.

In reaction to the Fed’s move, the Bank of England and the Bank of Japan have also injected liquidity, but the Fed’s efforts have been futile thus far as banks refuse to take on more counterparty risk.

Bond yields are also down significantly. The 3 month T-bill rate fell to the lowest level in over 50 years while the 2 year treasury bond yield fell to the lowest level in 5 years.

This tells us that the Federal Reserve will need to cut interest rates by more than 100bp. In fact, futures traders already expect rates to come down to 1.25 percent by the end of June.

However, if Bernanke really wants to reassure the financial markets, he should cut by 150bp tomorrow and come up with more creative ways to prevent another liquidity crisis on top of that.

I say no more band-aids Bernanke, please give us a real solution!

Could the Federal Reserve cut interest rates by 75bp tomorrow?

Yes, but as much as the market fears that another bank on Wall Street will collapse, Bernanke fears the consequences of under delivering. Unless he wants to cause the stock market to fall by another 300 points, he will cut interest rates by 100bp and the FOMC statement will remain dovish.

The need for further monetary easing and the uncertainty in the financial markets will continue to drive the US dollar lower, particularly against the Japanese Yen. Expect 200 to 300 pip days in the majors to become the norm.

Here is a snapshot of how economic data has changed since the last FOMC meeting:

Comments

[scobbydube:]

Lower rates are not going to help Main St... Banks don't have any reserves left to loan.. Lower rates are not going to change the current perception in the market place that maybe the bank, dealer, or hedge fund I am loaning to knows the value of what is on their books. They all own toxic securities that until recently have been marked improperly because no one tested the market by trying to sell these SIV's,CDO, etc.. How many basis points have they lowered rates so far and tell me honestly what good has it done.. Zero.. Pushing on a string..

2008 Mar 18 06:20 AM

[CrossProfit:]

Please check the 'manufacturing sector verdict' on the chart above. This could be a typo.

As an aside re- 'ISM prices paid': a lower number implies weakness however the flip side is that it also implies lower inflation. From the gist of the charts purpose, a lower number is red/down as stated.

CrossProfit

2008 Mar 18 06:21 AM

[roger maxims:]

you wrote "...the Fed’s efforts have been futile thus far as banks refuse to take on more counterparty risk..."

If Goldman Sachs tells JPMorgan "hey, I don't trust you as counterparty anymore" and JPMorgan tells Citi the same, the whole investment banking industry would go. The big boys know this and will not let it happen.

Instead, they must at least trust those huge commercial banks like Citi and Bank of America who have relatively stable mom and pop savers. None of that crazy TCI, S3 hedge fund stuff.

P.S. I venture that these hedge funds and private equity are bathing in champagne right now as their shorts pay off.

2008 Mar 18 06:38 AM