Will the Fed Intervene Early?

Today is going to be a critical day in the financial markets.  U.S. markets were closed on Monday while it was a financial blood bath on Monday in the E.U. and Asia and Tuesday was initially weak as well, although the European markets have stabilized at least somewhat.

The largest culprit isn’t earnings guidance out of companies that have reported.  That actually looks OK if you consider the environment.  This bond insurance counterparty risk could create a whole new wave of writedowns, but it could actually create worse actual charges instead of just paper value charges.  But now we have the DJIA futures indicated down 475 points or so.  Just yesterday we noted the possibility of a 1,000 point drop in the DJIA.

The Federal Reserve is far behind the curve.  It is our belief that a stimulus package will not be limited solely to this $140 or $150 Billion consumer package hinted at last week.  As part of "Financial Mergers May Be Mandated Rather Than Preferred" the Federal Reserve must take actions.  What has to occur is a Fed Funds cut.  Some want 50 basis points and some want as much as 75 basis points shaved off.  But there is also the Discount Rate that needs to be cut even more than Fed Funds so that banks can have a better shot at tapping the discount window at rates lower than they can invest or loan the money out at.

The Bush stimulus package hints last week were not given much fanfare.  If the FOMC decides that it should wait until the January 29 to 30 meeting to take action then they will be even farther behind the curve than they have been this whole time.  We’ve noted that we are already in a recession and the backward numbers just haven’t caught up yet.  Just last week Bernanke was discussing a slowing growth as though "it hasn’t happened yet" and maybe it won’t.  They can wake up and take immediate action to minimize just how deep the slowdown goes into recession. 

Otherwise, well maybe they might want to tell the public that the best way to make money is by shorting the stock market.  Its been more than 20 years since the last crash in 1987, so maybe Bernanke and friends want to see how the public reacts so they can add it to their behavioral theory discussions.

Jon C. Ogg
January 22, 2008