Just What Was in Those Fed Minutes Anyway?

Tuesday's market slump was the result of many excuses: new highs in oil, overbought condition, inflation data and the release of minutes from the Fed's last meeting. We've said many times, any excuse for selling will work...while buyers only need ONE reason. But let's drill down a bit into those Fed minutes and see what they were really thinking, and if it was truly the reason for the market collapse.

Like Clockwork, the Market gets Roasted

The Fed minutes were released at 2:00 EST, and while the market was weak at the time, the selling persisted and picked up the pace until the final bell. Right after the news hit the market imploded and hit the skids, but managed a very tepid recovery to end the day. So, what got the market in an uproar? It appears some carefully worded language may have spelled out no more rate cuts. If this is true, is the economy really in trouble? For months, the market has reacted to the Fed like a crack addict...needing more and more cuts for the latest fix. And yes, the Fed has been the accomodating drug dealer...for better or worse. But with all due respect to the limbo, we must ask: 'how low can you go'? Given the historic low rate of 2% on the Fed Funds, there is hardly more room to go lower. In fact, the bond market is saying ENOUGH already. The yield curve is normalized now and taking shape, forecasting moderate economic growth with moderate inflation. That's right!

Bernanke-Speak

The Chairman has a way with words. While acknowledging the challenge of rising inflation, he still indicates growth, or lack thereof is the major concern. The committee also believe the housing issue may be worse than expected, and while the TAF and other remedies may help somewhat, the credit crisis is far from over. So, maybe the Fed is NOT considering more rate cuts....that's fine, perfect with our futures expectations. However, the question to ask is when they will consider raising the funds rate. It's this argument that I consider the most critical. Yes, the inflation situation may become dire, but the growth picture is most important to the Fed, and the lack of trend growth could keep rates down for awhile. What will bring rates up? A couple of quarters of 3-4% growth would do it, and that may not occur until 2009. Bottom line, the Fed is backed into a corner, and for better or worse...rates will likely not move much until the economic needle goes positive.

Disclosure: None

Comments

[User 143167:]

Bond yields? Please get real by reading Merill and Goldam's 2009 FFR prediction, 1% and 1.5% respectively! The Fed is only a dog with the rope in the hands of Wall Street. The dog now barks and wants to run away, so Wall Street pull the rope by selling off at once to get it back on track. Just wait and see, with this market tumbles for another two weeks at most, the Fed will change its stance.

2008 May 23 01:34 PM

[Bob Lang:]

I'm very real...the relationship between short term/long term yields creates an upward slope left to right. Tell me, are Merrill and Goldman (sic) the Fed? Are their predictions EXACT? I'd say not, and I'd rather watch the futures market for an indicator of what the market believes, because the market is ALWAYS right...wouldn't you agree? You can find the fed funds futures right here at

www.cbot.com/cbot/pub/...

A little knowledge is a powerful thing...I suppose you'll have to figure out how to read this table, but suffice to say the futures market is NOT looking for rates below 2%. Can the Fed really do this with inflation in our economy?

thx, Bob

2008 May 24 09:41 AM

[dougnhi:]

The Fed will be forced to raise interest rates soon enough. It will have no choice. The amount of inflation being seen as a result of their pouring money into banks (and then they in turn feeding the speculators in the market), is a direct mainline for inflation. This is the end game. Now every dollar he bails out with, goes right to inflation. That's only a very short time perscription to a forced reversal to avoid even greater harm. Bernanke's legacy is doomed to go the way of Greenspan's if he doesn't figure this out and unwind. His cuts to save banking friends are only making matters worse. When the Bond and dollar holders finally give up, Helicopter ben will be forced to raise rates quickly. The idea that the economy is fine will be exposed for the farce that it is. Like it or not, even in the face of bad conditions, he will have to raise rates and let some banks fail. Anything else will only make the correction worse. Do we want an all out depression? Let's take some medicine and have the recession we need to clean up some of this wild speculative fever and return the markets to an investing mentality, and a little closer to a "free" market condition. Right now, we have a casino, with Helicopter Ben as the "house". It seems on the surface that he's helping, but a look behind the curtain shows that the house is robbing us all into national poverty.

2008 May 24 11:14 AM

[User 143167:]

The problem is, " do you guys really believe the big banks and credit market are fine now if the Fed is done with cuts." We're still half way through this credit crisis so an accomodative Fed has to be there for the Wall Street to survive. I think we will easily have 20% sell-off in the equity market engineered by the Wall Street as a wake-up call to the Fed if the Fed definately closes the door of more cutting.
Wise up. The future WAS priced in a cut to 1% in April but now it thinks the Fed is done. So things could be dramatically different in any 30 days.

2008 May 24 01:39 PM

[Bust 6576:]

The housing crises will be over when a house sells near its real value.
Anybody, with a brain, having worked with hammer and nail and plaster or electric wire - wall board to pipe, always knew a $50,000 house was never, nor, would ever be worth the $250,000, to, $millions of dollars being paid by the "must have or bust" consumer and the "will supply - while the iron is hot" developers, investors and various other opportunist. This all has to do with vanity, gluttony and greed. Once this all tempers - the crises will be over and some will win and others lose!

2008 May 27 02:22 PM