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Stealth Easing ?

Tuesday, October 07, 2008 | 09:00 AM

in Credit | Federal Reserve | Fixed Income/Interest Rates

Interesting activity on the part of the Fed. I suspect Bernanke & Co. are waiting for the the rest of the world's central bankers to start cutting to catch up with the US Fed.

"The Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.

The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

"Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.

The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline yesterday in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months."

Yet another arrow from the Fed's quiver has been used. How many more surprises do they have in their bag of tricks . . . ?

Source:
Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut
Scott Lanman
Bloomberg, Oct. 7 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2KRwOfPJk58&