Alright then. So based on the fact that the market controls the futures rate (in essence) and the market has been completely wrong before, how does the fact that the market is looking for a rate cut translate to the Fed actually cutting? Isn't it conceivable that the Fed holds back?
No. Because the Fed has already allowed the Funds rate to freely trade 5%. Is it possible that the 100bp's down the road will never materialize? Certainly. I'd add probable. I'll be shocked if we ever see 4% Funds again. Then again I'm a perma bear on Treasuries.....
Gotcha. So what you're saying is that if the Fed did not intend to cut the rate, they'd never have allowed 5% to trade. What if they weren't sure what they'd do, and wanted the option on the table? I'm not trying to be a pain in the ass. I'm just trying to understand a bit more. Thanks for taking the time to explain it.
You know when you hear reports "the Fed has injected a zillion in liquidity this morning?" That's the Fed shifting. IMO, they won't dare be Indian givers. IF the Bond-which has little practical "ties" to the overnight rate-had been sluggish through all this, I'd argue you may see a rather restrictive Fed. However EVERY segment of the curve, in fact every bond market in the WORLD has been rallying like mad. Fed policy is rather impotent in fighting non wage inflation. With housing weak, job creation dismal, credit cards maxed, the Fed probably figures who cares what the price of oil is as long as American's can't afford to fuel up their cars. Granted a cheaper dollar has been a major catalyst of commodity inflation. The dollar however has been breaking for years with the fed not having eased since mid 2003. Hence one can argue that the dollar is operating quite independent of Fed policy.
my guess for this highly unusual move the Fed wanted to give banks more money ie help financial sector not the broader economy. It says some big institutions are in trouble and it wouldn't suprise me if some big bank or a broker fails down the road and needs to be bailed out. I agree with the posters that from the general economy perspective the rate cut is not needed, it's too early .. I think the activity in gold reflects this fear when one type of money (securitized debt) gets into trouble another gains favor
So what happens in times like today, when some $1 or so billion in liquidity is withdrawn (at the end of today it's due, supposedly)? Second, the fact that the ECB has been injecting liquidity like there's no tomorrow doesn't seem to have an effect that they're going to keep hiking. So someone is a bit messed up there.
I am guessing a monster sized Euro bank is in deep over its head and time is needed to hatch a fix...... notice how quiet banks have been re: credit.....nobody's talking
When you step back and look at the markets they have recovered, look at this ES weekly charts, one would think a rate hike not rate cut.
also just like gold, the run on the treasuries reflects this desire to hold money which the market perceives as safer, the out of favor securitized debt is being proffered but nobody wants it anymore, so it stays on the books of financial institutions who are required to redeem it for cash, ex. the holder of commercial paper refuses to roll over. I don't know how it will be fixed, how do you restore confidence in the paper that loses trust, perhaps offer it at a steep discount, but that would require banks to take a serious loss on their holdings. but back to the rate cut, I think they will use it to prop up the stock market if/when the financial sector starts to drag it down. after the shake out the treasuries will sell