It is truly amazing to see how much the media influences what is happening in the market these days. It would have been thought that the Fed would be immune, but it is beginning to look like that is case less and less. In the last two months, the Fed has cut the Fed Funds rate 75 basis points, the true (not the market rallying euphoria) effect has not been felt nor will it be for the next several months. The suggestion that another cut is coming in December has propelled equities much higher. This is exactly what the talking heads on TV have been espousing for weeks. Now they have convinced people who matter to go along with this idea, regardless of the longer term consequences. Perhaps they should listen to their guests who, almost uniformly, think that the economy will continue to plug along without cuts. The real problems now are in the credit market. Lowering Fed Funds in and of itself will not necessarily help the credit market. Seventy five basis points hasn't helped out the LIBOR situation much, a rate that actually means something in the real world. If the Fed wants to help there, cut the discount rate to below the Fed Funds and take other steps (maybe reserve requirements) to get lending going. Have the Fed apply some moral suasion (before they lose it) to all the players involved to grease the wheels. Otherwise, the market will just become addicted to continuous rate cuts and the US will end up like Japan.
The Fed still has a chance to do the right thing, but it is looking less promising.
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Bondguy, I agree that the fed has to be careful not to make the markets easig junkies waiting for their next fix. A Fed ease (regardless of degree)will not help the housing market. In fact, home prices will not reach prices seen in the past few years (in general. real estate markets are local) until inflation runs its course over the years, but I digress.
There are some who believe that more Fed easing is necessary to protect the rest of the economy from a spillover from housing. The impact froma spillover remains to be seen, but a correction may not be avoidable or a bad thing.
Th economists at my firm are calling for 100 basis points of Fed easing by the end of the first quarter 2008 and 50 bps next month. Fed Vice Chairman Kohn's jawboning seems to be tacking in that direction. We know the Fed speaks with the big banks, but to the cow-tow to them? Sure looks like it.
Also, we have an election year coming up. Could the Fed be motivated to avoid a recession as not to spoil the election for a certain party? (See Greenspan 1992)
The Fed wil not do what you and I believe to be the right thing and hold the line. The Fed knows that mega writedowns are yet to come. Some major firms could be looking at more than $20 billion of hits without moving SIVs onto their balance sheets (and that is coming as well). Add the private equity loans to the mix and it is going to get ugly. Will it become catastrophic? Not based on what we know now. However, does the Fed know something we don't? That could be it. If the Fed is easing aggressively now, maybe the firms have come clean to the Fed and, indirectly to the rest of the world.
Great editorial in today's WSJ about dysfunctional boards at banks.
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