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No, I don’t want the Fed to cut rates because that would give a hyper boost to the stock market. And no, I’m not calling for rate cuts because of the housing market, the sub-prime meltdown or the subsequent shutdown of the collateralized debt market.
Rather, I believe the Fed should cut rates immediately because that’s what the market has been trying to tell it for too long.
Take a look at the chart below. It compares the 90 day treasury rate (black) to the Fed funds rate (blue). As you can see, the Fed funds rate follows the market set short term rate.
But the Fed got out of step with the bond market sometime this spring. As the rate fell, the gap between the two became more and more obvious. The two have not been this out of step in a long time.
The collective vote of the market is loud and clear. No committee, no matter how esteemed and knowledgeable, can know as much as a diverse and free market.
So this is my crazy call: the Fed will (or rather should) cut rates sooner rather than later.
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