Wednesday, August 22, 2007

I Don't Think The Markets Are Listening To The Fed

Bloomberg News reports that Fed Chairman Ben Bernanke wants to avoid having to cut the federal funds rate as a result of the recent subprime mortgage mess fall-out/credit crunch:

Chairman Ben S. Bernanke wants to avoid an emergency easing of monetary policy, contrasting with predecessor Alan Greenspan, who cut the federal funds rate target three times in 1998 after the collapse of Long Term Capital Management LP. Richmond Fed Bank President Jeffrey Lacker said yesterday that policy must be guided by the outlook for economic growth and prices, not entirely by markets.


Lacker said in a speech to a conference in Charlotte, North Carolina yesterday that while the credit crunch and gyrations in financial markets has the potential to hurt growth, signs so far indicate business and consumer spending will continue.

In response to a question, Lacker also underscored the Federal Open Market Committee's determination not to insure poor investments with a cut in the federal funds rate. Ten-year U.S. Treasury notes fell in response, pushing the yield up 4 basis points to 4.63 percent at 7:32 a.m. today in New York.

``The Federal Reserve isn't responsible for the size of credit spreads,'' he said. ``We leave those to be market determined. Our responsibility and what we are capable of influencing on a sustained basis is inflation and growth.''

Meanwhile back in the financial markets:

Stocks look set for a solid day as optimism for a cut in interest rates sweeps through the market.


Investors are increasingly convinced the Fed, the U.S. central bank, will cut rates sooner rather than later after it surprised markets on Friday by cutting the rate at which it lends to banks.

Clearly Wall Street wants an interest rate cut of at least 25 basis points in the near-term and is not going to be happy if Bernanke does not give it to them. I suspect they want interest rate cuts of at least 75 basis points by the end of the year.

These same greedy motherfuckers have been whining for interest rates cuts ever since the Fed first raised its benchmark rate to 5.25%. They claim the economy will be hurt if they don't get the cuts because they won't have the cheap money to make the buyout deals that have inflated stock values to historic prices and kept the irrational exuberance going for the last five years

And yet, if you read the Reuters article I linked to above, there are plenty of deals getting done today (E-trade and Ameritrade may merge; Dubai World bought a 9.5% stake in MGM Mirage.)

And if you read the Bloomberg article I linked to above, the Fed wants to only cut rates when the macro stats show that the economy has been hurt by the subprime fall-out/credit crunch.

Other than the housing market, which created this whole mess in the first place, the macro stats have NOT shown any serious harm to the overall economy from the recent market turbulence and credit crunch.

Not yet, at any rate. There will be fall-out, of course, especially in the job numbers as the financial sector continues to shed jobs. But so far, we don't have them.

So what's the rationale for interest rate cuts (which will simply save the asses of those who engaged in stupid, risky deals and ensure there will be more of them in the future)?

Simple - Wall Street wants them so they can reinflate their asset bubbles.

And as we learned during the Greenspan years, what Wall Street wants, Wall Street usually gets.

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