Australian (ASX) Stock Market Forum

US fed has cut discount rate half percent

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
 
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. :2twocents
 
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.
 
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.
 
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 yield on the three-month Treasury bill fell 66 basis points to 3.09 per cent after being down by 125 basis points during the day – a greater plunge than during the October 1987 stock market crash. The yield on the one-month Treasury bill fell 62 basis points to 2.33 per cent after being down 175 points. US equities closed mixed following gains in European and Asian stock prices.

The frantic scramble to obtain short-term government paper at almost any price suggests the Fed's move on Friday to make credit available to banks on more attractive terms has yet to stabilise the markets.

This in turn encouraged speculation the central bank would have to cut the federal funds rate, its main interest rate. In a sign of growing political attention to the crisis, Ben Bernanke, Fed chairman, and Hank Paulson, Treasury secretary, were to meet on Tuesday with Senator Christopher Dodd, the Senate banking committee chairman.

Analysts said the plunge in T-bill yields was driven by money market funds, which hold $2,700bn in assets, shifting away from asset-backed commercial paper, which promises investors the cash flows from mortgages and other loans.

In response to investors' pressure, funds that previously had sought to boost returns with more aggressive strategies have been selling asset-backed commercial paper and raising their holdings of government securities. At the same time, money is piling into traditional funds that only buy government debt.

"We had clients asking to be pulled out of money market funds and wanting to get into Treasuries," said Henley Smith, fixed-income manager at Castleton Partners. "People are buying T-bills because you know exactly what's in it."

Data from Dealogic showed companies in Europe failed to refinance more than 80 per cent of asset-backed commercial paper that matured on Monday.

Separately, people close to the situation said Deutsche Bank had taken advantage of new terms offered by the Fed on Friday by borrowing at the "discount window". They said the move was taken to show support for the Fed's actions.

Mr Paulson and senior Fed officials were talking to large institutional investors and banks in an effort to calm markets, but policymakers denied they were trying to talk up prices.

One investor said he had been called over the weekend by a senior Fed official seeking to "explain" Friday's decision to lower the discount rate.


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?
 
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
fed cut 1.JPG
fed cut 2.JPG

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