Wednesday, January 30, 2008
the fed will cut 50bps... right?
1) the economy has clearly hit stall speed with the 4q gdp number coming in at 0.6%, a figure that may well be revised down into an actual contraction at a subsequent date. many have commented anecdotally that consumer spending has really deteriorated more recently (ie, december onward) as well. yields across the entire treasury curve have fallen dramatically in recent weeks, and not all of it is just equity money seeking a week of safe harbor. inflation simply isn't going to be a big concern with this as context.
2) the banking situation is taking a turn for the scary. banks -- more clearly now than every -- have to be recapitalized, and one (slow) way to do it is cut their cost of borrowing and thereby raise their margins. even if one argues that the cuts already in the pipeline to the economy are enough to reflate, there's no arguing that bank profitability could be helped immediately.
3) the fed has a lot of market latitude to do so. as noted by traders narrative, fed funds is still 125bps over the 3-month t-bill yield, which it has tracked fairly closely over time. the most recent term auction facility operation was stopped out at 3.123% as well, well under the 3.5% target rate -- meaning the effective borrowing of banks in the TAF is just about already there.
as such, even a 75bps cut wouldn't be out of line with past reflationary practice and current exigency.
UPDATE: right? RIGHT. markets have initially responded positively, with the s&p running straight up to resistance at 1378 -- the 10% line off the recent low.