# US fed has cut discount rate half percent



## cuttlefish (17 August 2007)

pump it

so what actually is the discount rate vs the fed funds rate?


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## springhill (17 August 2007)

Im no expert in global economics but doesnt this move just equate to short term gain leading to long term pain?


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## cuttlefish (17 August 2007)

yep - but the US fed is between a rock and a hard place - and they've chickened out and cut.


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## reece55 (17 August 2007)

springhill said:


> Im no expert in global economics but doesnt this move just equate to short term gain leading to long term pain?




Ding ding - you have hit it on the head springhill........

So watch for a bit of a rally and then dust of the short game........... It's like saying "Don't worry, we don't mind that you (the lenders) have completely screwed our global financial system by giving loans to people who couldn't afford it. We will reward you".


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## theasxgorilla (17 August 2007)

Seriously unbelievable.  Do the words "not on my shift" sound appropriate?  Cramer screamed at them over the TV, called one of their member a _shame_ and they lose their nerve and do this.  Hmmm.


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## toothfairy (17 August 2007)

springhill said:


> Im no expert in global economics but doesnt this move just equate to short term gain leading to long term pain?




Wow, look like we Aussies are having some of the highest interest rates atm, just before the fed election. How would John & Peter explain this?
Oh yes, we are having some short term pain now for ah ah, long term gain when Labor takes over.


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## insider (17 August 2007)

Toothfairy...You caused this 0.5% cut from business discounts didn't you? It's only in your nature to leave surprises under stock brokers pillows


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## reece55 (17 August 2007)

theasxgorilla said:


> Seriously unbelievable.  Do the words "not on my shift" sound appropriate?  Cramer screamed at them over the TV, called one of their member a _shame_ and they lose their nerve and do this.  Hmmm.




Yeah ASX.G, it's a joke.......... It will just provide a buffer....

The reality is the US screwed the worlds financial system - when the last time you saw a AAA rated note have more than 10% of it's portfolio beyond 90 days!

Oh well, it will be something I can tell my grand kids! LOL.


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## Captain G (17 August 2007)

The Fed is in desperate fire control, where it will probably end up being a backburn go badly wrong!!


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## toothfairy (17 August 2007)

insider said:


> Toothfairy...You caused this 0.5% cut from business discounts didn't you? It's only in your nature to leave surprises under stock brokers pillows



Have no idea what you are talking about, I don't own & run any business & don't know / use any stock brokers. I am retired and use electronic share trading.


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## springhill (17 August 2007)

toothfairy said:


> Wow, look like we Aussies are having some of the highest interest rates atm, just before the fed election. How would John & Peter explain this?
> Oh yes, we are having some short term pain now for ah ah, long term gain when Labor takes over.




IMO we are suffering interest rate rises because people are pissing their money up against the wall and living outside their means, nothing more nothing less. We are the 'i want it now generation'; 4 by 2 house, new car, holidays, plasmas, alcohol, cigarettes, drugs. Nothing to do with 'senile' Johnny or 'two faced' Rudd. If people have borrowed more than they can afford, well as Mr T says 'meet my friend pain'. Who says 2moro never comes? 2moro comes when the bills are due


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## Awesomandy (17 August 2007)

Whoops... I can see economic confidence vaporising from the general public in a few days time, when they finally start thinking "we are probably in more trouble they we think". 

In the meantime, it's probably not a bad thing for those who still happen to hold some long positions. It's a good opportunity to sell and brace.


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## R0n1n (17 August 2007)

lets not forget that the feds cut the discount rate and not the the key federal funds rate.

The discount rate is the interest rate charged to commercial banks  on loans they receive from regional Federal Reserve . It differs from the key federal funds rate, which is the rate at which private institutions lend to other depository institutions overnight.


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## sweeet (18 August 2007)

Fed is still watching. the rate cuts just because of the OE day for August..


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## brettc4 (18 August 2007)

I think the US have their banking system wrong which has had a helping hand in this liquidity crisis.

To me they have way too many small regional banks, all of them trying to make as much money as possible.  How do you do that, lend as much money as possible. People don't match the lending criteria, change it, lend anyway, they don't make money when they are lending at discount rates to other banks.

So they lend out to anyone and everyone, to me this causes a couple of issues:
1. the take liquidity away form those institutions that may need it for what ever reason
2. They lend to the wrong people and bad debts go up.

This 50 basis points discount helps alleviate point 1 a bit as the banks can get their hands on money a little cheaper, but not a lot, but there will still be an increase in bad loans over the coming period.

Westpac went through bad debts, it took them a number of years but they came back, there is still plenty of pain to be had ahead.


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## theasxgorilla (18 August 2007)

springhill said:


> IMO we are suffering interest rate rises because people are pissing their money up against the wall and living outside their means, nothing more nothing less.




To be honest, you can't blame regular people.  There is some of what you describe going on in the world...but if you want to blame something/somebody for consumer indescretions, the finger ought to be pointed at the media and the psychological warfare advertisers wage.  I went without a TV for two years and started watching again just before I left Australia and I was embarrassed by what I saw...WTF does Mark Taylor know about airconditioners anyway???

And regular people wanting 2 cars, a nice house, a holiday house, a boat, nice clothes, kids going to a good school etc. etc. is not actually wanting that much in a country as wealthy as the US or Australia.  The problem is the fat cats who need 7 cars, 10-bedroom houses, great big f%¤k off yachts etc.  Their consumption footprint could provide 10 familes of regular people with the modest wants I just mentioned.

When the social fabric of a country breaks and more and more people can't find the discipline to take care of themselves properly, and the country is as wealthy as Australia or the US, the only question to ask is, who the f%&k is in charge here???  Somewhere in Texas is a village without it's idiot...'nuff said.


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## springhill (18 August 2007)

theasxgorilla said:


> To be honest, you can't blame regular people.  There is some of what you describe going on in the world...but if you want to blame something/somebody for consumer indescretions, the finger ought to be pointed at the media and the psychological warfare advertisers wage.
> 
> And regular people wanting 2 cars, a nice house, a holiday house, a boat, nice clothes, kids going to a good school etc. etc. is not actually wanting that much in a country as wealthy as the US or Australia.  The problem is the fat cats who need 7 cars, 10-bedroom houses, great big f% ¤k off yachts etc.  Their consumption footprint could provide 10 familes of regular people with the modest wants I just mentioned.




I do love a good rant,but I cant argue with anything you have said here ASX G of course your everyday Joe Shmuck wants all these things, as i do too, all im saying is each one of us should be living within OUR OWN means, not running to the bank to keep up with the Jones'. As for advertising, although they do prey on peoples weaknesses, people still make the concious decision to drive their ass to the shop to purchase goods with money they dont have.


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## toothfairy (18 August 2007)

springhill said:


> IMO we are suffering interest rate rises because people are pissing their money up against the wall and living outside their means, nothing more nothing less. We are the 'i want it now generation'; 4 by 2 house, new car, holidays, plasmas, alcohol, cigarettes, drugs. Nothing to do with 'senile' Johnny or 'two faced' Rudd. If people have borrowed more than they can afford, well as Mr T says 'meet my friend pain'. Who says 2moro never comes? 2moro comes when the bills are due




Lending out lots of money keeps banks in business which keeps the economy flowing.
Borrowing lots of money can well be for business expansion, even for personal use its up to the individuals. Plenty of people borrow to invest in stock market. Nothing wrong with that. $ can make $.
How much is too much is not up to you or me to judge for them. People have their own brains to figure out their comfort zone. What one person is comfortable in may be totally uncomfortable for you. Everyone knows what to do as they are free to choose ( as advocated by the late Milton Friedman).
The point I am making is I don't think Aussies are particularly extravagant in world standard yet we are paying relatively high rate in a country that has so  so much minerals that other countries apparently need.


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## dhukka (18 August 2007)

Does anyone really think this move by the Fed solves the problems in the financial sector? Mortgage brokers, banks and hedge funds are still saddled with impaired MBS and CDO's that nobody wants. A short term to solution to some short term funding issues. 

I hear dead cats bouncing.


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## springhill (18 August 2007)

toothfairy said:


> Plenty of people borrow to invest in stock market. Nothing wrong with that. $ can make $.




......Until the :fan Then the borrowed $ that didnt make the $ has to be paid back, isnt that part of the problem we are in at the moment?


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## insider (18 August 2007)

Unfortunately I believe we live in a society that has lost its identity (that's why you have people calling themselves some other nationality instead Australians and so forth) and because of this lack of identity a lack of self value is brought
so we turn to all these materialistic things for comfort... Lets just say people like to splurge on nice cars and so forth because they are compensating for insecurities and worried about what people think of them... They think with out it they are nobody...  losers


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## toothfairy (18 August 2007)

springhill said:


> ......Until the :fan Then the borrowed $ that didnt make the $ has to be paid back, isnt that part of the problem we are in at the moment?



Our market had been good for years, if investors had not gained profits to pay for the current fall, they should be eliminated from the game anyway. 
As for the beginners who have just started at the wrong time, that's the tuition fee they have to pay to stay & play. They'll figure it out in the long run. Don't have to punish them with higher rates.


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## Pommiegranite (18 August 2007)

*TRUST*

Its a bigger word than it seems.

I'm out and couldn't give a crap what the market does. 

I have lost trust that the market will behave the way it is supposed to.

Until that returns....I'm out. And boy its gonna take a lot to convince me.

Too much panic....and I don't admit that I've played my part.

10% loss since April!!


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## dhukka (18 August 2007)

Level headed article from Minyanville's Todd Harrison




> Yesterday, while we were trucking through the muck, we asked the question: What happens when the FOMC "shocks" us with a rate cut?  Our answer was simple””at a point, we fade the trade.  We've seen this movie before, in 2001, and after a sharp Snapper, the conditional elements that precipitated the snippage were more important than the scissors itself.
> 
> Particularly when a (soon to be ex-) Fed Governor said the previous day that the FOMC wouldn't act before September unless there was an outright calamity.  Nice poker face, Jane!
> 
> ...


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## springhill (18 August 2007)

toothfairy said:


> Our market had been good for years, if investors had not gained profits to pay for the current fall, they should be eliminated from the game anyway.
> As for the beginners who have just started at the wrong time, that's the tuition fee they have to pay to stay & play. They'll figure it out in the long run. Don't have to punish them with higher rates.




I agree but unfortunatly they will have to reap what has been sown since '87and more so in recent years. And the crop may not be good
Dont you just love a good cliche'?


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## theasxgorilla (18 August 2007)

toothfairy said:


> The point I am making is I don't think Aussies are particularly extravagant in world standard yet we are paying relatively high rate in a country that has so  so much minerals that other countries apparently need.




You are right...Aussies live quite poor compared with a lot of Western European countries and parts of the US.  And you can't fool people into spending more than they make/have without the smoke and mirrors of the modern financial system.  In the _olden days_ if you had 2p left in your purse a day before father was paid, that was that, you managed.  Now we have credit cards.  

Read Michael Hudson's essay, The Road to Serfdom.  Don't worry, _serfdom_ is used figuratively.  We have a far better standard of living than prior generations,  but its not in proportion to how hard we work or how productive we've become.  We've got better tools and yet we are working harder than ever.  The middle class is being manipulated out of a better life by people  Hudson calls "the would be Lords".  The MacBank CEO _earns_ over 20 million AUD a year.  His _investment solutions_ are worth 400 times more per week than the average Australian.


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## wayneL (18 August 2007)

dhukka said:


> Level headed article from Minyanville's Todd Harrison



I like Todd, he is one smart cookie... and not prone to "bubblevisionthink".


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## Kimosabi (18 August 2007)

*Goodbye US Dollar!!!*

*Everybody say hello to the Amero...*



*Proud new currency of the North American Union...*


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## wayneL (18 August 2007)

From another forum fwiw:


> Almost, almost everyone on the this entire forum has misunderstood what the Fed has done.
> 
> They have not created a swathe of unbacked cash to wash away everybodies woes.
> 
> ...


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## theasxgorilla (18 August 2007)

wayneL said:


> From another forum fwiw:
> The unwinding will continue for another ~3 months at least.
> 
> We still have no idea who is going to bear these loses. And it will take time for positions to unwind.




If they release more money into the system, particularly as positions are liquidated from assets to cash, won't it eventually show up as inflation?  Is this where the losses are to be hidden/obscured?


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## insider (18 August 2007)

If this cut was sooo special I think the Muppet Index would be trading a bit higher than it is...


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## wayneL (18 August 2007)

From the same source as before: (fwiw)



> People who buy up positions in this window are idiots. Pure and simple.
> 
> It's a sell off. This is like an interval. There are no profits to be made by holding stock from here.
> 
> ...


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## Pommiegranite (18 August 2007)

I can't believe the market rallied off the back of this 'cut'.

I was bullish until this week...but this 'cut' is such an obvious desperate message. 

The next message next month will be when they lower interest rates.

I know people are saying ' buy when there's blood on the streets' etc.....but surely we need that blood to have clotted first...clots removed...before we buy again?


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## Pager (18 August 2007)

I think the Fed did exactly the right thing.

Markets were very much on edge and panic was setting in, it wouldn’t have taken much to see an irrational melt down, but taking this action has given the markets some breathing space and to let the waters clear and see how deep problems run, maybe more to come but don’t think we will see the panic that was becoming more and more evident.

They have also said no bailouts, so those who are in trouble won’t be thrown a lifeline.

Cheers

Pager


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## Awesomandy (18 August 2007)

Pager said:


> I think the Fed did exactly the right thing.
> 
> Markets were very much on edge and panic was setting in, it wouldn’t have taken much to see an irrational melt down, but taking this action has given the markets some breathing space and to let the waters clear and see how deep problems run, maybe more to come but don’t think we will see the panic that was becoming more and more evident.
> 
> ...




I'm not sure if there is a right thing to do, for the problem was created a long time ago, and anything they do now would be too little, too late. The way I see it is that this move has most likely delayed an impending crash. They are just betting on the off chance that the market will rebound from this, but the problem is, people who can't pay their mortgage still can't pay their mortgage, which is where the meltdown started a month ago anyway. My scenario is that we'll have a dead cat, (which would allow us to off-load any remaining longs) before another major slide down.


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## theasxgorilla (18 August 2007)

S&P500 closed up 2.46%...the weekend is here...looks like the Fed saved us just in time...I'm going to bed


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## numbercruncher (18 August 2007)

dhukka said:


> Does anyone really think this move by the Fed solves the problems in the financial sector? Mortgage brokers, banks and hedge funds are still saddled with impaired MBS and CDO's that nobody wants. A short term to solution to some short term funding issues.
> 
> I hear dead cats bouncing.





I think theyve stuck a bandaid over some open heart surgery. The bandaid will slow the bleeding but infection is bound to set in.


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## mick2006 (18 August 2007)

I don't know about you guys but I get the feeling that some of the big boys found out about the discount rate cut late in the day on Thursday and that was why the dow rallied 300 points to finish level.

As for Fridays trade I think it is very much a relief rally and there could still be much worse to come.


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## bingk6 (18 August 2007)

numbercruncher said:


> I think theyve stuck a bandaid over some open heart surgery. The bandaid will slow the bleeding but infection is bound to set in.




The actions of the FED clearly show their desperation. However what options do they have ?? There are really no good options available and ANY decision will be hammered one way or another. 

The Feds are clearly of the opinion that if they did not act now, things will get out of control real fast and then there will be nothing they can do about it. It may well be that its already too late !!! If all you had are bandaids, would you apply it now, or do you wait until infection sets in ???


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## resourcesman (18 August 2007)

Like all of you, I think the effect of this cut is psychological rather than anything else and doesnt' have any real effects. But I think that the psychological effect is exactly what is important. 

When we look back on this in a year's time when things are back in full swing, we'd probably see that a restoration of confidence was all that was really needed, because the real global economy would not be affected as much as it has by a hit to the US subprime market. 

The one thing that could have caused these problems to spill over into the real global economy is a loss in confidence and the resulting diminishing supply of money and credit crunch. This confidence looks likely to be restored by this move and promised moves in the future.

That's not to say that we wont have further volatility, I'm sure we will over the next few weeks.


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## tcoates (18 August 2007)

> The actions of the FED clearly show their desperation. However what options do they have ?? There are really no good options available and ANY decision will be hammered one way or another




It should be remembered this also occurred in 1998 with LTCM. There are different circumstances between then and now. But they are damned if they do and damned if they don't. 

Tim


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## Smurf1976 (18 August 2007)

How long before the real truth comes out?

We've found a few stray termites in the mortgage business and a bit of sawdust from a few hedge funds. _Somewhere_ there's some seriously damaged wood. Question is how much, where and what happens when it finally gives way?

We'll find out soon enough and the Fed will want to have restored some sense of normality prior to that time. Two medium sized crises are generally easier to handle than one truly massive one whether it's a real world physical disaster or something in the markets. 

As for specifics, some of the ones that come immediately to mind are:

Hedge funds
Investment banks
General Motors
Ford
US mortgage GSE's

The possibility that someone is quitely drawing down stocks in order to suppress the price of oil is another, albeit less certain, possibility. With the need for stock draw set to reach millions of barrels per day by the end of 2007 according to credible (IEA) demand forecasts, sooner or later they'll run out of stocks to draw from. Note that the US oil inventory data isn't obtained by acutal measurement but rather by a computer model. It would be _very_ easy to bury a slide in stocks in the data until they approach zero.


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## wayneL (18 August 2007)

An interesting and comprehensive post on this blog, in particular note comment 5: http://investmentpostcards.wordpress.com/2007/08/17/stock-markets-how-deep-is-the-rabbit-hole/


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## bean (18 August 2007)

A short article with a few charts  but interesting reading

BERNANKE TO REPLAY 
GREENSPAN'S 1987 ROLE?

http://www.financialsense.com/editorials/vronsky/2007/0817.html


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## moneymajix (18 August 2007)

http://www.smh.com.au/news/business...troubled-waters/2007/08/17/1186857771241.html

How the Reserve steadies ship in troubled waters
Ross Gittins
August 18, 2007

On and off for the past week the central banks of the United States, Europe, Japan and Australia have been reacting to the global financial turmoil by "pumping additional liquidity into financial markets". But what does this mean?

I suspect that a lot of people - including players in the financial markets - don't know. I've heard suggestions it involves easing monetary policy (lowering interest rates) or even printing money.

Wrong. Far from involving a change in the stance of monetary policy it involves a determination to ensure it doesn't change. Far from giving anyone a free ride, the central banks were merely giving some banks a temporary loan at the normal interest rate.

To see what they're doing and why they've been doing it, you have to understand how the central banks set their official interest rate. Since all central banks do it pretty much the same way, we'll look at the way our Reserve Bank does it.

Everyone knows the Reserve uses the manipulation of interest rates to manage the pace of demand in the economy. It raises interest rates when it wants to discourage borrowing and spending and so dampen demand and inflation pressure. It lowers rates when it wants to encourage demand and the creation of jobs.

To do this the Reserve controls a single interest rate, on which all the other short-term and variable interest rates are based. The media call this the "official" interest rate, but its real name is the overnight cash rate. (In the US it's called the federal funds rate and in Euroland the repo rate.)

The trading banks always need to settle debts between each other arising from the presentation of their customers' cheques. A bank also needs to pay money to, or receive it from, the Reserve Bank and its main customer, the Federal Government.

To this end each bank maintains a special account with the Reserve Bank, known as its exchange settlement account. All the payments passing between the banks and the Reserve or the Commonwealth go through these accounts.

The money in these accounts is called "exchange settlement funds", but since that's such a mouthful, it's usually known by its nickname, "cash". (In other words, cash in this context doesn't mean what you thought it meant.)

Banks with surplus cash in their accounts are willing to lend it overnight to other banks that are short of cash. The interest rate charged on these loans is the overnight cash rate.

The level of the overnight cash rate is determined by the balance of demand and supply of cash in the banking system. That balance changes from day to day, depending on the banks' payments to and from the Reserve and its customer, the Federal Government.


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## moneymajix (19 August 2007)

Jim Cramer

DOW new highs

http://www.cnbc.com/id/15840232?video=473088648&play=1


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## Bruster (20 August 2007)

What's all this latest hankey pankey
by the Fed chairman Ben Bernanki?
Does he really think the sub-prime
crime can be turned around on a dime
when there isn't much hope at all
from markets eventually going into free-fall? 
Just like when he wanted to put a stop t' the whingin' 
by revving up his helicopter engine
and dropping money to the people on the ground.
All this money that the people found
would be just a quick fix but not a solution.
It would only cause more currency dilution.
So I say to you the same is true with his latest caper. 
It's just some figures on some paper.
The only figures I'll be greeting 
are a 1/4 percentage cut at his next meeting.


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## dhukka (21 August 2007)

I'm surprised nobody has been talking about his today. Anyway this seems like the appropriate thread. 



> *Flight to safety hits Treasury bill yields*
> 
> Money market investors staged a dramatic flight to safety on Monday, knocking down yields on short-term US government debt, as top Treasury and Federal Reserve officials continued behind-the-scenes efforts to maintain confidence in the credit markets.
> 
> ...





The euphoria surrounding the cut in the discount rate doesn't seem to have had the effect on sentiment in credit markets the Fed had hoped for. So if not,  why the euphoria? Is it time then for the Bernanke put?


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## bean (23 August 2007)

I posted the on POG link

An interesting article here
Quote:
USFED RATE CUT COMING NEXT
Forget for now the futures market and its indicator of the likelihood of upcoming official rate cuts. Turn to a more powerful market, which is more important than an indicator. The USFed is behind the curve by about a mile and a half. The FedFunds rate target is firm at 5.25% but they did cut the discount rate last week to best bank customers by 50 basis points. This followed emergency Fed Repo actions taken two weeks ago, amounting to around $40 billion in mortgage bond repurchases. What was not explained was two things. First, were only subprime mortgages repo'ed, or some prime mortgage bonds also? Second, were only Wall Street offerings of bonds accepted for repo, in a veiled Wall Street scummy bailout?

The 2-year Treasury Bill yield is below 4.2%, more than 100 basis points lower than the knucklehead desperados at the USFed have their target. Worse, the 3-month TBill yield has fallen well below 4.0% and during an intraweek situation, fell below the 3.0% mark. If one checks the behavior of the USFed over the course of the last twenty years, a discovery will come. They have been very obedient to the short-term bond market. The highly liquid, ultra-short-term 3-month Treasury market indicates 150 basis points in USFed rate cuts are coming, JUST FOR STARTERS!!!
The Charts






The article in full
http://www.321gold.com/editorials/willie/willie082307.html


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