Wednesday, January 30, 2008

What's spooking the Fed

Just a quick thought on the 50 basis point cut in short term Federal interest rates --- over the past week or so the US Federal Reserve has moved its overnight rate from 4.25% to 3.00%, or a drop of roughly 30%. That is a massive change in interest rates over a short period of time, and more interestingly, if you believe the 2001/2002 speculation that the fiscal plumbing stops working in the US when US overnight rates hit around .50%, the Fed has used up roughly 35% of its ammunition for all contigencies in just a week.

The 4th Quarter GDP report is not good, especially if the projected December personal expenditures data cliff dives as it pretty much needs to in order to make the .6% annualized growth believable as that shows significant recent weakness... but when was the last time the Fed gave up such a large percentage of its option space?

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