Financial, Economic Slides Force Fed Actions

Barron's ^ | 10 March 2008 | RANDALL W. FORSYTH

[shrinkermd]

Thus far, the Fed's recent, sharp interest-rate cuts have served mainly to push down yields on risk-free Treasuries, the dollar's value in currency markets, and pushed up the prices of gold and other commodities. Investors have fled for these safe havens while depressing the markets for so-called risk assets, set off the rolling thunder of margin calls, which beget more forced selling and then more margin calls.

But beyond hedge funds and leveraged mortgage real-estate investment trusts, the market's risk aversion now has investors shunning even what had been considered gilt-edged assets -- mortgage-backed securities issued by Fannie Mae and Freddie Mac, which have triple-A ratings and what is widely perceived to be the implicit backing of the federal government.

To combat the spreading contraction of credit availability, the Fed announced Friday morning it would sharply increase its so-called Term Auction Facility auctions to $50 billion from $30 billion. In a colloquial sense, the TAF is like a pawn shop where banks can take assets as collateral and get cash. In addition, the Fed also said it would inject a total of $100 billion through 28-day repurchase agreements.

Even more important is that any type of collateral -- including Fannie and Freddie MBS -- can be used for these loans to the market. Translation: the Fed is putting props under the beleaguered mortgage market, which is no longer suffering just from the meltdown in subprime or even alt-A loans or prime jumbo loans, but also now for so-called conforming loans, the sort that Fannie or Freddie can buy.

[shrinkermd]

"...The financial and economic stresses both point to the need for the Fed to act aggressively, which the federal-funds futures market expects to happen in the near future. It is pricing in a 2.25% funds rate target by month-end, down from 3% currently, with a possible cut even before the next meeting of Federal Open Market Committee on March 18.

[Need4Truth]

“The Economic Cycle Research Institute’s latest reading on its U.S. Future Inflation gauge showed further declines. This indicator, which predicts turning points in the inflation cycle, dropped to a four-year low in February, indicating “it is clear the widespread worries about an uptrend in U.S. inflation pressures are not warranted,” the ECRI said.”

Are we at a turning point toward deflation?

[Black Birch]

Are we at a turning point toward deflation?

Using the Wal*mart big screen TV deflater index, I would say we are....

[ANGGAPO]

I wish that Bush and our meat heads in congress would take a look at what all of this is doing to the old retired folks in our nation. I am beginning to think that we have been tossed under the bus as collateral damage.

[rabscuttle385]

Are we at a turning point toward deflation?

The significant drop in the market value of real estate in markets such as Northern Virginia wasn't deflation? In some areas, values corrected as much as 60 percent.

[ex-Texan]

The economy is doing poorly and has been doing badly for nearly two years. The Fed is saying the economy is growing. Questionable economic data are being used openly.

Watch this Video . . . Even if you have to watch it in a public library.

[count-your-change]

Lower interests rates may attract borrowers but why would a lender want to increase loans at a lower rate? Lower interest rate favor debtors if they borrow cheap money to pay off expensive debt. Higher interests rates favor lenders as renewed debt is at a higher rate and deposits are increased. Since the U.S. is a debtor nation lower interest rates only encourage inflation as projects that make no sense can be financed with cheap money until a correction flushes the bad debt of out of the system, as we’re seeing now. Since interests rates should be set by demand no one can say what the rate should be and the tinkering with rates by the fed can only have damaging consequences since one can never predict the fed’s mood swings.
But since the large banks are really the fed’s only constituents we are seeing the bailout beginning and we can be the pain of bad decisions will softened considerably by tax dollars.

[Travis McGee]

"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."~~Harvard Economic Society, October 19, 1929

[shrinkermd]

Yes, Ron Paul is impressive on this subject. Good post.

[M. Espinola]

It's going to be a wild market week ahead.