Friday, September 14, 2007

Some thoughts on the Fed....

Tuesday is the big day. The market seems split between 25 and 50 bp but it is my feeling that 25 is what is expected but 50 is what is hoped for. But what would 50bp do other then leave the Fed out to dry. Why ? Well the main problem as I see it is the Libor rates by cutting Fed Funds it does nothing to lower those rates, rather it leaves the market vunerable to inflation pressures (see oil and food prices) and the the Fed really has a problem. So what should they do? Well thank you for seems to me that the Fed should cut the funds rate 25bp and the Discount rate 50bp and extend the duration at the discount window to 3 mth maturity. This would have an imidiate impact in the libor rates (come crashing off) as who would borrow at Libor when you could take term money at a much lower rate.

I am sure I am missing something somewhere but this seems to be the only solution for a fix. The Fed does have a problem. Clearly slowing growth (how slow is yet to be determined) a potential inflation issue (some might argue that there is already an inflation issue) and a liquidity situation that shows little signs of letting up.

Any thoughts.....Let me know.

Good Luck and Good Forex Trading.



Anonymous Nemo said...

The effective rate has been approximately 5%, not 5.25%, for the past month:

Federal Funds Rate Data

And the Fed continues their repo operations, so they have already changed the target rate in practice.

I think they will cut the official rate by 25 bps and cut the discount rate by either 25 or 50.

But they have to get the liquidity where it is needed, and that's not Treasuries. They may ultimately have to accept lower-grade collateral and/or open the discount window to non-banks. That will not happen on Tuesday, but some language anticipating it might.

This thinking is not original to me; this FT piece discusses it in depth. I would love to know the author's sources...

11:14 AM  
Blogger Banker said...

I hadn't seen this particular article. Thanks it was a good read.

8:03 AM  

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