The consensus is overwhelmingly for a September rate cut, following the Fed’s surprise move on Friday to cut its discount rate on loans to banks to 5.75 per cent while leaving the more important fed funds rate unchanged. But a range of opinions on blogs and mainstream media shows widely differing degrees of approval for the Fed’s action.
A dose of penicillin or a shot of adrenaline? Investors interpreted the Fed’s surprise 50 basis point cut in its discount rate as the latter – US equities surged on Friday morning, with financial stocks leading the charge. RBS Greenwich Capital points out that discount window borrowing has been minimal during the turmoil. On that basis, the cut is all about utilising other techniques to try to make money flow.
Hence, the Fed is reiterating its watchfulness and emphasising that it accepts a wider range of assets, including home mortgages, as collateral in the discount window compared with open-market operations. That reduces the chance of an immediate emergency Fed funds cut. Indeed, until there is more clarity on the extent of the structured credit problem, it is not clear how much help such a cut would provide.
Ben Bernanke, Fed chairman, has not capitulated – note that the discount rate spread was not erased entirely. He has, however, given ground and, in spite of Friday’s slight downward move, Fed funds futures still imply investors expect one or more cuts by the end of the year.
[The Fed] cut a symbolic rate that no one uses and the stock market is predicted to have its biggest up-day in history. This underscores how psychological this selloff has been. Sometimes it is better to make statements than to actually do anything. –Bianco Research
Welcome to serious market volatility – this is a panic measure by the Fed and will lead to the main rate being cut with serious ramifications re inflation, oil prices and the USD. Markets don’t like shocks and once the uplifts occur, the markets will go down severely. Hold onto your hats …
This will be good news until about lunch time when the world outside of Wall Street realizes that a cut at the discount window means nothing to the millions of folks looking for rate cuts on their mortgages. This is lipstick on a pig, and is merely delaying the inevitable.
– Posted by: Reed Hypothecation
While I appreciate the symbolism of the Fed early today cutting its discount rate to the best borrowers…damn you Ben Bernanke for making me wake early for no reason: the truth is, it isn’t particularly practical. According to the most recent data, borrowing at the window has been a reasonable approximation of nada in recent weeks, something like $11m in the week ended Wednesday. Markets, of course, will see this as a further step toward an ease, which locks in something the Fed futures had already forecast as a lead-pipe cinch: A September rate cut.
You don’t need to buy [Ben] Bernanke’s analysis of the 1930s, published 25 years ago, to find clues to his conduct of monetary policy today.
Whether the Fed was primarily responsible for the severe and sustained economic contraction of the 1930s, as asserted by economists Milton Friedman and Anna Schwartz, or just bears partial responsibility, is still a subject of lively debate among economic historians almost 80 years after the fact.
It is perhaps fitting that Bernanke used the occasion of Milton Friedman’s 90th birthday to assume institutional responsibility for the Great Depression. He said: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
He meant it. He won’t.