Open Thread: A Stealth Fed Rate Cut?
Today's absurdity was this rumor circulating that the Fed was arranging a secret meeting.
Than the rumor came that they were going to cut next week.
But my favorite rumor du jour was passed along by the WSJ: You see, according to some of the more cleverer Horse Central bank Whisperers out there, the FED HAS ALREADY CUT RATES.
"The Fed's primary weapon is its influence over the federal-funds interest rate, at which banks with excess reserves lend to banks that are short reserves. When demand soared last week and the market interest rate rose above the target, the Fed pumped in extra cash. But in times of turmoil, it can be difficult for the Federal Reserve Bank of New York to fine-tune its interventions. In recent days, the rate has traded well below the Fed's target at some points of the day -- even coming close to zero at times. That has prompted some in the markets to deem this "a stealth Fed easing."
That was the reason given for the comeback today. Not that we had sold down 1,500 Dow points in less than a month, but (shhhhh!) whisper after me: "Fed cut."
Stealth cut, or absurd rumor?
What say ye?
>
Update: August 17, 2007 9:38am
Whoopsadaisy!
>
Source:
Has the Fed Secretly Cut U.S. Interest Rates?
Markets Wonder As Federal-Funds Rate Lingers Below Target
DAVID WESSEL in Washington, LAURENCE NORMAN in New York, ENDA CURRAN in Sydney and MICHAEL S. ARNOLD in Tokyo
WSJ, August 16, 2007 2:25 p.m.
http://online.wsj.com/article/SB118726976751399608.html
Thursday, August 16, 2007 | 07:30 PM | Permalink
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» Is the Fed EasingRates? from The Everyday Economist
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Comments
Interesting, Roubini too claims the Fed has already effectively lowered the Fed Funds rate by 50 BP's:
http://www.rgemonitor.com/blog/roubini/
He believes the Fed will need to 'formalize' this cut or else the turmoil will "sharply worsen."
Posted by: Pool Shark | Aug 16, 2007 7:37:39 PM
I say keep your metaphorical teeth numbered so you'll know where they all go back.
Posted by: Eclectic | Aug 16, 2007 7:48:38 PM
Roubini is reffering to the effective fed funds rate which was trading below 5% for the week and around 5% on Thursday.
Barry this is what I was emailing you about this AM to elaborate on. By pumping liquidity injections into the banking system they have in essence lowered the effective fed funds rate via a synthetic ease without lowering actual fed funds rate.
Fact is, this is a liquidity crisis and the fed's injections assisted the big banks, NOT the consumer! The consumer is still being hit as the last man standing in this liquidity squeeze and the only way to help that is by cutting fed funds rate, which will hit at a lag anyway.
I still think 5 1/4 fed funds rate is NOT restrictive and that the fed should continue with liquidity injections instead of rate cuts unless things get real hairy, and that means DOW 11,500 or so in a relatively short period of time.
The guys that made loot and are now suffering with their bad bets should not be bailed out. Let the free markets work this out.
Posted by: UrbanDigs | Aug 16, 2007 7:50:48 PM
What I don't get is that the fed has been injecting money every day for a long time now. The info is publicly available. At least to the tune of $5 billion a day. Why are they making a big deal of this now?
Posted by: jim | Aug 16, 2007 7:59:31 PM
OMG, for sure Batman. This has nothing to do with normal market operations-which have been using this same mechanism literally for decades. This is the Fed's job. When the say "cut/raise" rates it's thru open-market operations. AND they inject/withdraw funds to hold to the target. Taking few minutes to savor the exquisite schadenfreude of the same folks screaming at the Feds for leaving rates too low for too long screaming louder for emergency cuts we now point out they use such operations to manage the actuals to the policy rate.
Given the speed, force & rapidity with which this rumor speed thru the slave quarters you'd think the Messiah was nigh; or Kaiser Szolzay. Even if it turns out to be true this is wish fulfillment of the highest order.
Posted by: dblwyo | Aug 16, 2007 8:03:49 PM
The reason the fed would rather do a stealth (trial and error) easing rather than an overt cut, is if they overtly cut the fed funds rate and it does not help, they will have a cerdibility problem and the mkt will have much bigger confidence problem.
Posted by: pjfny | Aug 16, 2007 8:20:28 PM
The Fed sort of lowered rates when every other Central Bank raised theirs.
Technically they should have removed money from the market today when the real rate went down. They didn't. That helped everybody a little, except for the ultra-greedy bears.
Rate cut this year? Only if the real economy tanks. Just my opinion...
Posted by: mhm | Aug 16, 2007 8:22:25 PM
Urban Digs - "The consumer is still being hit as the last man standing in this liquidity squeeze and the only way to help that is by cutting fed funds rate."
Unfortunately a cut in the fed rate may not help the consumer or businesses either. If we believe that lenders have re-priced risk, and the spreads on all kinds of asset classes seem to suggest that they have, a rate cut may not make any difference to the real economy. So whereas before a 25 basis point cut in rates would have more or less resulted in a 25 basis point reduction in mortgage rates, corporate bond rates, etc., now a 25 basis point reduction in mortgage rates still has consumers and businesses screwed relative to where they were several weeks ago.
All this fed lubrication (and an eventual rate cut) may do is shift the effect from a bank-led credit crisis to a consumer-led consumption recession. Probably what the fed wants anyway since bank-led credit crunches can immediately drag an economy down, consumer-led recessions take time to play out.
Posted by: Salomon | Aug 16, 2007 8:43:27 PM
crony capitalism in the U.S. market is fine and well and clearly looking like a bigger version of Mexico moreso every day.
Posted by: km4 | Aug 16, 2007 8:43:32 PM
"The reason the fed would rather do a stealth (trial and error) easing rather than an overt cut, is if they overtly cut the fed funds rate and it does not help, they will have a cerdibility problem and the mkt will have much bigger confidence problem."
Good Lord! They ALREADY have a huge credibility problem given their prognostications to date. Now when clear communication is required they go into stealth mode?????????? If this turns out to be true, i.e. stealth, history will use this example of how to screw up matters even more.
Posted by: Stuart | Aug 16, 2007 8:44:46 PM
agreed Salomon!
Posted by: UrbanDigs | Aug 16, 2007 8:54:36 PM
Hasn't that rumour been there pretty much every day lately? I think it was more a case of the "10 percenters" showing up and the shorts who were afraid that they might.
Heard another interesting idea during CNBC chatter (sorry; no idea who said it). If you're a hedge fund facing redemptions next month, and you've been lucky enough to be short the financials for awhile, how do you raise cash? You cover, right?
Posted by: Globalized | Aug 16, 2007 8:56:15 PM
Just for clerification:
the Fed sets an interest rate target for the Fed funds (overnight bank reserves) market. When the actual Fed funds rate is higher than the target, the desk will usually increase the money supply via a repo (effectively lending). When the actual Fed funds rate is less than the target, the desk will usually decrease the money supply via a reverse repo (effectively borrowing).
"Fed funds trade up at 5.25 percent, matching target
Thu Aug 16, 2007 2:51PM EDT
NEW YORK, Aug 16 (Reuters) - Federal funds traded in the market up at 5.25 percent in New York on Thursday, matching the 5.25 percent target rate for overnight money the Federal Reserve sets.
That was a move up from the 5.0 percent level fed funds had traded at earlier in the New York afternoon. Earlier on Thursday, the Fed injected a combined $17 billion total of reserves into the banking system via repurchase operations."
So as they lend repo they are influencing rates up.
Posted by: RobT | Aug 16, 2007 8:56:37 PM
agreed Salomon!
Posted by: UrbanDigs | Aug 16, 2007 8:57:21 PM
Sorry, mis-print on previous post. I meant, "now a 25 basis point reduction in FED FUND rates still has consumers and businesses screwed relative to where they were several weeks ago."
Posted by: Salomon | Aug 16, 2007 8:58:29 PM
Until there is a permanent injection of liquidity, there is no stealth cut. The last permanent injection was 5/3/07. Temporary injections of liquidity are not capable of generating more than fleeting bits of confidence.
Posted by: David Merkel | Aug 16, 2007 9:01:36 PM
Wouldn't that scenario have them trying to help unfreeze the credit market while leaving all the major underlying problems still in place for the smart money to figure out? Plus at this point it's like whizzing on a 5 alarm fire.
Posted by: SPECTRE of Deflation | Aug 16, 2007 9:06:56 PM
You got it Spectre. A fed rate cut will not make the sub-prime problem go away. It will not make all those joe sixpacks who need to re-nut on their mortgages when their ARM's expire any better off. The only thing it will do is prevent an immediate mark-to-market for all the mortgage-backed paper that all these hedgies, banks, and institutions are holding. So rather than forcing everyone to sell at once and forcing the price down to zero as a result of mass margin calls, there might be a more orderly wind down of those assets.
Don't worry though, it's all contained - LOL!
Posted by: Salomon | Aug 16, 2007 9:15:52 PM
stealth cut, they've done it before. 9/11 being the biggest example
Posted by: Michael Donnelly | Aug 16, 2007 9:20:10 PM
The Federal Funds Rate is set by the markets. When the rates spiked to 6%, the Fed had two options: 1) buy treasuries to infuse permanent reserves or 2) fund repos to inject temporary reserves.
By chosing to inject temporary reserves at below the discount rate, the issue may have simply been to show the commercial banks that the Board of Governors had altered their bias and were prepared to ratify a future cut if necessary.
Posted by: Winston Munn | Aug 16, 2007 9:28:30 PM
"Stealthiness", the lack of transparency got us into this bloody mess.
Posted by: Stuart | Aug 16, 2007 9:29:00 PM
Asia is getting hammered again tonight. Maybe todays rebound was just caused by massive squaring of short positions?
If so, there are better bargains straight ahead. I do not yet see widespread panic. The pretty people on CNBC are still recommending bargain hunting at these levels.
Posted by: Werner Merthens | Aug 16, 2007 9:30:50 PM
Back in the day (pre-Greenspan) the Fed never announced its rate decisions. They simply adjusted rates on their own, and people would have to figure out what happened after the fact. When Greenspan showed up, they started announcing rate cuts in the interest of "transparency".
So it would not be at all unprecedented for the Post-Greenspan Fed to revert to Pre-Greenspan operating procedure. In fact, you could even spin their decision not to report M3 as just such a move.
The question is -- why would they do that right now? It wouldn't have the psychological value of putting a floor under the markets, even short-term, which would ostensibly be the purpose of such a move, since the "real-economy" effects of a cut aren't what's needed right now, in their view. So I kinda doubt it.
What I wonder is whether Frank Poole may be setting things up for what we'll call the 1998 Bob Rubin Special. If you'll remember, Rubin came out in the thick of the 1998 currency crisis and said "there's no way we're cutting rates". The shorts piled into every kind of currency trade, having been given the green light by Rubin. Then, the next day -- a 100-basis-point cut! The shorts were blown to shreds and forced to cover, putting a floor under the market. Bob Rubin, Secretary of the Treasury, flat-out *lied* to the markets, but it was brilliant -- the rate cut had even greater effect with a ferocious short squeeze behind it.
Unfortunately, I don't think any such hijinks will bail us out this time. The economy is leveraged to the hilt, and the workout will take time. But to put in a short-term bottom, the Fed may well pull a page from Bob Rubin's playbook....
Posted by: speedlet | Aug 16, 2007 9:32:27 PM
Speaking of hedgies....anyone care to address the unwinding of the yen carry trade tonight......And what won't that complicate things for the Fed a bit?????
Posted by: zell | Aug 16, 2007 9:35:04 PM
By the way, I don't know why everybody on CNBC isn't recounting the above... it's yet another "the Fed's gonna save us" scenario.
Posted by: speedlet | Aug 16, 2007 9:36:08 PM
