Tuesday, December 16, 2008

The Fed surprises with a 75bp cut

The Fed came out swinging today, cutting the Fed Funds rate 75bp to 0.25%. The FOMC established a target range for Fed Funds of 00 to .25%. This is not overly surprising as the Fed Effective on most days has been down in this range. The vote was unanimous and this rate is expected to be in place for quite some time. Effectively the Fed is saying, stop putting your money in treasuries and get out there and invest (Stocks, small business's) or better yet SPEND.

The Fed wanted to make it clear that they have other tools at their disposal and are not afraid to act if needed. The primary focus of the monetary policy moving forward will be the Quantitative Easing measures that the Fed is using. The measures will "sustain the size of the Federal Reserves balance sheet at a high level". They also repeated that they are going to purchase large quantities of agency debt and MBS to support the mortgage and housing markets and it stands ready to increase the amounts as warranted.

The Fed also said it would expand the use of its balance sheet to "facilitate the extension of credit to households and small business" while using the balance sheet in creative ways to "further support credit markets and economic activity". Basically the approach seems to be that the Fed will do anything and everything to get the Economy rolling again.

They also believe that decreased oil and other commodity prices in addition to increased slack in the economy will lead to lower inflation.

The reaction from the markets was positive. Treasuries and stocks rose but the dollar came under tremendous pressure. I think all of these trends will continue to the end of the year.

Good Luck and Good Currency Trading

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