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After the Rate Cut?

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Fed's move signals large-scale monetization of debt markets.

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The US Federal Reserve pulled out all the stops yesterday in a frantic effort to save the US economy from collapse and stem the deflationary forces. The Fed funds rate was slashed from 1% to a target range between 0 and 0.25% – the lowest the central bank's key rate has been since records began in 1954.

In reality, the Fed is simply aligning its target rate with the effective rate, thereby pushing monetary policy into an era of ZIRP, i.e. a zero interest rate policy.


Click here to enlarge.

The Federal Open Market Committee's (FOMC) statement said the "outlook for economic activity has weakened further" from its previous meeting in late October, indicating that the "Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability". The statement also discussed specific actions that would move the Fed further toward quantitative easing.

In my opinion, the Fed's communiqué in reality signaled the large-scale monetizing of the US debt markets.

Sharing my sentiments, Bill King (The King Report) commented:

"Ben Bernanke and the Fed just screwed everyone in the US, and some abroad, that played by the rules, was prudent and live on fixed incomes. Ben, just like Easy Al, is once again redistributing wealth from the prudent, the savers and retirees to the reckless and the boobs that created this mess. But the Fed, via its communiqué, is admitting that it is petrified of what is occurring in the economy and financial system so it is now in all-out money/credit dump mode."


An email from Bennet Sedacca (Atlantic Advisors Asset Management) said:

"[The] Fed has declared war on prudence and savers and rekindled the 'Moral Hazard Card' - except this time, I believe they have created the largest moral hazard ever seen. Of note is that this intervention has occurred in the third week of the month (options expiry for the greatest impact – playing games with an already dysfunctional system that they created) and may force prudent, risk-avoidance types, to take risk, at precisely the wrong time.

"I respect markets, and won't sell short against this force that seems invincible. But, as always, will remain cognizant of the Big Picture, one that Bernanke and Co. cannot see, it seems. In fact, it feels like they are making a mockery of our system, that they are desperate and will print enough dollars that will force other central bankers to do the same.

"With stated short-term interest rates at 0 (and likely to stay there for the foreseeable future), 30-year Treasuries at 2.3% and stocks at gargantuan price/earnings ratios, we will look to continue to protect our investor's capital as we have done to date. I don't like being forced into a game of 'Liar's Poker'."


With Treasuries and agency debt potentially subject to a great deal of price risk at these levels, and the US dollar appearing to be topping out, where does the Fed's "betting the ranch" policy leave the stock market?

First, for some historical perspective, the MSCI World Index and the MSCI Emerging Markets Index have improved by 18.9% and 23.2% respectively since the November 20 lows. As far as the US markets are concerned, the Dow Jones Industrial Index has gained 18.2% since the low, the S&P 500 Index 21.4%, the Nasdaq Composite Index 20.8% and the Russell 2000 17.1%.
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No positions in stocks mentioned.
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