Normally, I would talk about my expectations for interest rate decisions, but after today actions by the major central banks, I thought it would be better if I discussed what these cuts will do.
I will be the first to admit that I got it wrong. Looking at all the different ways that the Fed has attempted to increase liquidity in the credit markets, it seemed like the Fed had realized that its usual weapon, rate cuts, was shooting blanks. The target rate had become more of a hindrance to the Fed’s actions. But, when they received the ability to pay interest in reserves, putting a floor on the rate, it appeared as if they could focus on the newer weapons in their arsenal. However, as we saw this morning (or last night depending on where you are), this is not the case
Being the insane institution that it is, the Fed has resumed firing blanks at the market, hoping it will be scared to death, or rather life in this case, but there is no actual impact. Although, this time the insanity has spread. Hey, if one blank doesn’t work, a bunch of them will have an effect right? This entire move is symbolic, it is an attempt to return confidence into the markets. And the market knows this.
The Fed and government have already done so much in the US, but they haven’t given these actions enough time. The problem with the credit markets is not exceedingly high prices for the lenders, i.e. interest rates, it is the unwillingness of lenders to lend. This will only happen with enough time, we have barely seen the effects of the Fed’s first rate cuts, not to mention Paulson’s $700 billion bazooka, $900 billion worth of TAF lending, or any purchases of commercial paper by the Fed. Yet, officials continue to do more and more to unfreeze the markets. The problem with doing so much so fast is that the tendency is to over react. And when the markets return to normal, they do so too fast, so officials must step in and over compensate again, continuing the vicious cycle.
The bottom line is that if Paulson’s bazooka was unable to unfreeze the credit markets, certainly shooting blanks is a pointless endeavor. It looks like what the markets need now is a flame thrower, a flame thrower of confidence.
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David Leal
Market Analyst
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Yahoo IM: IFXleal
DLeal@IntegrityFXllc.com
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The Fed's Weapon of Choice
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