Tuesday, December 11, 2007

Fed looks timid today

Late yesterday when reading Washington Mutual's significant negative news, I considered following up on that day's post by suggesting that now a 50 basis point cut in the Fed Funds rate was more likely. I didn't as a ninth grader's social studies test(from the dreaded Dr. Dorman) required my attention and my energy.

What almost led me to do a second post in a day when sometimes that's as many as I do in a week was this. The seventh largest banking institution in the country had just more or less announced that it urgently needed lots of liquidity and capital or it needed to be acquired. At the least, digesting that news, the Fed needed to reduce the discount rate, their direct lending rate to financial institutions by 50 basis points, if not the Fed Funds rate, but both seemed highly likely late last night. Today the Fed went with a 25 basis point reduction for both, and it seemed lame. It was clear that the Fed would not choose to make a bold statement and hold the rate firm and, with the WaMu news fresh, it is clear now that the Fed did not make any kind of bold statement on the liquidity front. It was like no news, and the market needed some.

From this perspective, the extent of the stock market downturn today came as a result of the WaMu set-up. It almost seems as if the Fed already had their presentations written and prepared for delivery, and there was no turning back. Bureaucrats and traders were not a good mix today.


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