The Fed Stands Firm

To the surprise of the financial markets, the Federal Reserve left interest rates unchanged at 2 percent. Going into the meeting, everyone thought that the Fed was backed into a corner and would have no choice but to cut interest rates by 25 and possibly even 50bp. Although the tone of the FOMC statement was relatively cautious, the action (or more specifically, the lack of action) by the Federal Reserve indicates that they are not going to bend to the market’s pressure.

One of two things probably compelled the Federal Reserve to hold back today - with liquidity injections and 325bp of easing since August 2007, they probably believe that they have done enough. Or they have injected so much liquidity into the financial system today that they want to give the markets the opportunity to respond. If things get worse, they can always cut interest rates in October or between monetary policy meetings.

Equity traders are not going to like the outcome of the Fed meeting because they were hoping that a rate cut would help to stabilize the financial markets and prevent another bloodbath in the stock market. At this point, the Dow hitting 10k is not only possible but increasingly probable. Keep an eye on AIG (AIG). Without the help of the Fed, things could get worse for the banking sector.

For the US dollar, this is good news because the recent correction was triggered by the readjustment of interest rate expectations. Now that the Fed has failed to deliver, dollar bulls have a reason to jump back into the markets, especially with the stimulative impact of $91 a barrel oil. We expect the downtrend in the EUR/USD and GBP/USD to resume. USD/JPY should also trickle lower as US equities sell off.

Comments

[levin70:]

as the markets seem to have no memmory from one moment to the next, your call on the dow is possible, but the markets ended 1,000 points higher than estimated (approx 10% higher). Tomorrow will tell.

2008 Sep 16 04:56 PM

[Reinko:]

What can I say?
A US $ run from 1.60 to 1.42 or 1.41 on the €/US$ pair in a very short time.

Rate differential is as next:
USA: 2.00% (and far too high given local economical things)
Europe: 4.25% (and far too low given local economical things)

Beside this, inflation in the USA is higher than in Europe.

Real interest rates in the USA are negative, in Europe we hang around zero but the ECB constantly refuses to restore long time positive rates.

All in all: In 2010 the €/US$ pair will be above 2.00 (but you never know it in the currency markets, you never know it with those Chicago boys!)

2008 Sep 16 06:46 PM

[Kath H.:]

This is probably the operative statement:

"One of two things probably compelled the Federal Reserve to hold back today - with liquidity injections and 325bp of easing since August 2007, they probably believe that they have done enough."

2008 Sep 16 07:58 PM

[1worldcurrency:]

"Fed stands firm." Comical in light of AIG.

2008 Sep 16 08:11 PM

[SW Richmond:]

"Fed firmly hands $85 Billion of taxpayer-backed money to another member of the "Friends and Family Plan".

Calling my Senators and Congressman (again) to complain bitterly about the ease with which laws are brushed aside and my family and I are put on the hook for more $Billions of corporate stupidity and greed. These actions by the government are totally unlawful, invalid, without merit. They are, and must be seen, as acts of despotism. Further, they must be treated as such. They must be seen as the best reasons anyone could ever need why the government shouldn't be in the business of "running the economy". These are acts of desperation, theft, self-dealing, and total corruption.

"Resolved, That the several States composing, the United States of America, are not united on the principle of unlimited submission to their general government; but that, by a compact under the style and title of a Constitution for the United States, and of amendments thereto, they constituted a general government for special purposes — delegated to that government certain definite powers, reserving, each State to itself, the residuary mass of right to their own self-government; and that whensoever the general government assumes undelegated powers, its acts are unauthoritative, void, and of no force"

2008 Sep 16 08:56 PM

[JasonC:]

Sorry Richmond, they are entirely legal, they are the actual purpose of the Fed, and no you are not guaranteed naked leveraged shorts to zero by the US constitution.

2008 Sep 16 09:18 PM

[SW Richmond:]

I'm not short AIG you moron. I'm not here talking my book like everyone else. I'm disgusted with all of my future earnings, and my kids' future earnings, being handed out to anyone that wants some. If the "actual purpose of the Fed" is to do that, then the Fed cannot be Constitutional, even if it is marginally "legal". It's f*cking slavery to the investor class.

You people who love government power are the most dangerous sort of all. You are the real enemy, the collaborators, the enablers, the satraps. It's easier on the inside, right? Why fight the system when it can be so good to you?

How's life in your gated (soon to be "walled") community?

2008 Sep 16 09:48 PM

[otbricki:]

SWRichmond - so how exactly is a loan at LIBOR + 850 fully collateralized and at the most senior level a hand out? The Fed is going to make a bundle on this. I wish I could get terms like this.

2008 Sep 16 11:10 PM

[SW Richmond:]

t's the "fully collateralized" part that is the biggest joke of this many-part joke. Government is not in the business of running businesses, except in a corporatist state where there is no real line between government and business. My money is at risk, was put at risk by the government in a business venture. Is there some part of that you don't understand?

2008 Sep 16 11:26 PM

[SW Richmond:]

And in case no one thought to mention it, AIG has 2.6 billion shares outstanding, and was trading at a low of $1.25 per share when the rumors of a bailout started. We just paid $40 a share for something we could have bought for $1.25! What a deal!

2008 Sep 16 11:40 PM

[otbricki:]

You are missing the concept that you are getting 80% of a company with 1.1 trillion in assets for an $85 billion line of credit that carries an 11.5% interest rate. Don't feed me any bull about current mark to market or short driven panic stock valuations being a valid valuation.

This is a steal.

2008 Sep 17 08:33 AM

[1worldcurrency:]

If it's such a great deal why didn't anyone out there in the free market do it? No, it had to be rammed down the taxpayer's throat.

1.1 trillion in assets. Really now.

2008 Sep 19 05:53 AM