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Why Today’s Rate Cut Isn’t Enough at Trader’s Narrative

Why Today’s Rate Cut Isn’t Enough

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bernanke headacheYou’d have a headache too if you had his job.

We’ll never know how the market would have traded without the Fed rate cut but I have a feeling it didn’t make much of a difference.

I’ve been telling the Fed to cut rates since last summer so if you’re one of my 4 long term readers, this is not new to you.

The Fed is continuing to chase the bond market in a cat and mouse game. Only problem is that the Bernanke Fed has been unwilling to do what is really necessary to bring the discount rate to alignment with the bond market.

It is the Fed that actually mimics the interest rate as set through the bond market (not the other way around). Today’s “surprise” 75 point basis cut may seem huge by historical standards but if you compare it to the short term T-Bill rates, you’ll see that much more is needed.

Greenspan had a much better track record in keeping the Fed discount rate as close as possible to that set in the bond market. See how close the black Fed rate hugs the blue short term bond market rate?

Since Bernanke replaced Greenspan in February 2006, we’ve seen a significant decoupling between the two. From early 2007 till now, the short term bond market has been consistently and significantly below the Fed rate.

This has exacerbated the liquidity crisis and it will continue to do so the longer it lasts.

federal funds rate 3 month tbill rate

The “risk free” three month Treasury Bill rate closed at 2.35% today. That’s 115 basis points below the brand spanking new discount rate of 3.5%

All the Fed has done is cut the gap between the short term T-bill from 139 basis points (Friday) to 115 basis points (today).

Can you imagine what the market would do if Bernanke & Co. came out with a cut that size?

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8 Responses to “Why Today’s Rate Cut Isn’t Enough”  

  1. 1 Keith Shepard

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    So what do you think…are Bonds a short here?

  2. 2 Scoad

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    As one of your 4 long term readers all I can say is keep the great stuff coming. It is perplexing how it can feel like an 80% 3yr bear [ NASDAQ 00 to 03 ] when its been 6 mos and 15%. Maybe its that Wall St is getting gored more than the public for once so their wailing [as personified by Cramer just because hes most visable] gets everyone on edge.
    One thing that keeps me buying is that despite the big volume drops and numerous [ by normal standards] 90-90 days, onthe highest volume days [ except for last week] there seems to be a bid under the mkt. In both the Nov. bottom and Jan. [but not in August I believe] the days with the most volume were either up days or turn around days. Its been fairly subtle often not enuf to tip up volume over down volume, but somebodies somewheres is taking all that stock thats for sale. You’ve been talking about insiders buying. This smacks of another kind of insider- big money privy to the real value of things. With deep pockets and not in a hurry.
    Also seems like consensus is now that support has given way- well one hasn’t and I havn’t seen it mentioned anywhere so thats good. Watched support should fail, you want it to fail, its unsafe before it fails, but unwatched support is almost like the old days of TA when it was voodoo and doodoo so it could actually work because only a few used it. If thats clear [ha,ha] then there’s an old and simple maxim that once resistance is breached decisvely it then becomes support. Well the only major, general stock index to breach decisively its resistance levels from 2000 is, was the DJI [You can add DJT, DJU, RUT, ect. but I mean general and well followed]. We finally probed back into that support today. If it holds it may mean alot more than many might think. The Dow has been considered passe for a long time now. Modern investors follow the S&p, Nas comp., Nas 100, but the Dow stocks are the behemoths that can no longer be labeled America Inc. they have graduated to Trans- Global Inc. Guess what? the world wants what they make, CAT, GE, XOM, MRK ect. Jeff Immelt said last week that the global infrastructure boom goes on unempeded. If the DJI can hold its recently won [ over the last yr] support it may mean the worldwide boom is still strong [Look at the rebounds in Brazil and Mexico today] and it [ the DJI ] may be strong enuf to tow the entire mkt- w/some volitility and a lot of wheezing for the next few mos to be sure, but wouldn’t that be a surprise if the Dow became the leader again.

  3. 3 Scoad

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    Well the DJI got hammered into resistance again Wed. and didn’t like being pinched inthat spot AGAIN and it hammered right back. When I typed the previous comment I was thinking ” Well this is a pretty weak reed, but somehow its got some moxie “. After looking a little closer I noticed the Dow has more company than I thought above the 2000 resistance, as in; NYA, RUT, DJT, DJU and a whole raft of sector indexes, besides which many overseas indx are so far above 2000 resistance they cant even look back and see the smoke back there where they started burnin up the road.
    Which brings up a 2nd pt. Just saw a table by Bespoke showing relative oversoldness of mkts worldwide. Its awesome. The US isnt’t even close to top. The bunge is really streched. I’ ve been figuring that we were near bottom of some kind but that the bounce couldnt go too far before it had to come in for a retest or go a bit lower, but after seeing this table, it looks like there’s more potential power there than i thought. I’m in Costa Rica where Ive been every JAN for 20 yrs and its been in a pretty steady boom for 20 yrs. but this yr when I expected a slowdown- HA- its booming dbbl-time- I’ve never seen anything like it- 3 times as many people from all over the world are here this yr. If the rest of the developing world is like this, and sounds like it might be, then this developing mkt correction is just that and its gonna get smoked to new hi’s in short order. The people who bought FXP and the like or shorted commodities in the last wk might be feelin a lttle queasy pretty soon if this place is any indication. Remember fellow US provincials, there are 300 mill people inthe US but there are many times that in the rest of the world. If the rest of the world is rollin the US probs might not make much difference and might get fixed a lot quicker than our insular thinking might suspect. PURA VIDA MAI

  1. 1 Percentage of Nasdaq Stocks Above 200 Day Moving Average
  2. 2 Why Today’s Rate Cut Isn’t Enough | black friday
  3. 3 Sell Bonds, Buy Stocks: Stock & Bond Valuations Dislocated
  4. 4 Why Bernanke Isn’t Finished Cutting By A Longshot
  5. 5 Federal Reserve Still Behind The Curve

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