50 BPS!
The monetary central planners delivered an upside surprise of their own today, cutting both the federal-funds rate and the discount rate by 50 basis points. Stocks immediately surged when the numbers were released. The Fed had widely been expected to cut its main short-term interest-rate target by a quarter of a percentage point.
The vote was unanimous, and the statement is pure bull-feed. The words about market turmoil posing a threat to economic growth clearly indicate a Fed willing to respond to trouble on Wall Street even before there is clear evidence of a broader impact on the economy. The FMOC also signaled that further rate cuts could be coming. We can't help but be reminded of those words from earlier in the decade. Shock and awe. Pre-emptive doctrine. Let's Roll!
Some had said that the Fed might have to cut the target rate by at least 50 basis points, however, to have a real effect on the economy. For the past few weeks, the effective Fed Funds rate—the rate at which banks lend to each other overnight—has been well below the official target rate, prompting some to say there had already been a “stealth cut” in the rate. The argument was that if the Fed still viewed interest rates as posing a threat to the health of the broader economy, it would have to cut by more than 25 basis points.
Although the bulls charged into the market at the news, not everyone is happy about the decision. As the Wall Street Journal reported, many believe that the rate-cut is a bailout for speculators and Wall Street that poses a “moral hazard” problem. The words “Bernanke Put” are already on the lips of some.
“50 BPS=Fifty Bailout Points,” one bearish investor to us just after the cut was announced. "That sound you hear? That's the sound of Ben flying over head in his helicopter."
Ironically, the cut comes just a day after the Guardian quoted Alan Greenspan, who is perhaps most famous for holding down interest rates to historically low levels during his tenure as Fed Chairman, as saying the that "inflationary pressures are going to start to build." (Hat tip Barry Ritholtz's Big Picture.)
FOMC statement after the jump.
Federal Open Market Committee Statement.
Release Date: September 18, 2007
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.
Comments
This definetly proves that the whole "chief economist" or "investment strategist" gig is bogus. Not one talking head predicted 50bps. Neither did I. But I don't get paid to.
Posted by: mlps | September 18, 2007 02:23 PM
Some much for my shorts.
Posted by: SHIT! | September 18, 2007 02:30 PM
you can only go into the cookie jar so many times before your out of cookies
Posted by: ceoandpresident | September 18, 2007 02:31 PM
moral fucking hazard
Posted by: Anonymous | September 18, 2007 02:33 PM
Sweet! Markets 3% off all time highs and Benny cuts 50bps! Thanks for ushering in inflation, further (how is tha even possible??) dollar depreciation, and speeding up the arrival of that recision you're oh so worried about.
Posted by: Bill | September 18, 2007 02:34 PM
Let's party like it's 1929!
Posted by: Dirk Diggler | September 18, 2007 02:36 PM
Bye bye dollar! Hello inflation!
Posted by: Anonymous | September 18, 2007 02:40 PM
You guys knew that he was going to cut big, how could you not put yourself in position to take advantage of it? Shorting is crazy with Bernanke in there he proved that Aug 17. Ofcourse cutting is the wrong thing to do but you knew he would do it anyway so you might as well make a buck from it.
Posted by: BailoutBernie | September 18, 2007 02:40 PM
Bernanke bails out mini ballers/Jim Cramer. I can't fucking believe this shit. Whatever, lesson learned Greenspan put still very much in affect.
Posted by: Random Banker | September 18, 2007 02:43 PM
Ah, let's see ... dollar at secular lows vs. euro... gold ... GBP ... pretty much f'ing everything ... but no! Core CPI is moderating!
This is why academics shouldn't be given any power. They are too lazy to check their data and too lazy to game out the enormous incentives to manipulate it, at all levels of the decision making chain.
Arthur Burns is back.
Posted by: AF | September 18, 2007 02:46 PM
1. Depending on the period of time you look at, the binary options market on Fed Funds was implying a 60-70% probability of a 50bps
cut.
2. European markets had rallied significantly prior to the announcement. The know things.
3. Recent gloom and doom meant that the market would collapse (again) if it didn't get what it wanted (i.e. 50bps cut).
So it was a pretty good bet that there would be a 50bps cut and markets would rally on the news.
Posted by: Anonymous | September 18, 2007 02:54 PM
i dont believe in interest - i vote 0%
Posted by: Anonymous | September 18, 2007 02:56 PM
this is like the third time in like 4 days you guys have said FMOC instead of FOMC...this begs the question do you guys actually know what the correct acronym is and what it stands for?
Posted by: Anonymous | September 18, 2007 03:09 PM
Anonymous 3:09:
this raises the question: do you know what "begs the question" actually means?
educate yourself
Posted by: Anonymous | September 18, 2007 03:17 PM
also, it's obvious JC knows it's FOMC:
"FMOC statement after the jump" is followed immediately by "Federal Open Market Committee statement"
don't be such a twit
Posted by: Anonymous 3:17 | September 18, 2007 03:20 PM
Any suggestions on how I can keep all my cash in a euro or pound sterling denominated account?
Posted by: AJ | September 18, 2007 03:30 PM
Yep. Everbank.
Posted by: Moving to Canada, Hilary is Next | September 18, 2007 03:32 PM
Try a deposit in Northern Rock
Posted by: Anonymous | September 18, 2007 03:35 PM
I guess the Greenspan conspiracy-theorist troops are out in force , their Tin-Foil Hats on in full glory , loudly complaining on The Big Picture how this never should have happened ....... dimwits
Posted by: Volcker | September 18, 2007 03:38 PM
this won't help the banks. We're in a fear and contagion cycle.
I don't know how anyone would think the fed WOULDN'T cut by 50bps after the latest UE and inflation numbers.
Posted by: Anonymous | September 18, 2007 03:49 PM
oooh thats a sweet picture. also, ISI has been calling for the 50bps so not all strategists are bogus
Posted by: Anonymous | September 18, 2007 03:52 PM
EverBank, headquartered in Florida = asking for trouble
Posted by: I'm just saying... | September 18, 2007 03:57 PM
Not good enough, Bernanke! I want 50 more bps each day until the end of the week.
Posted by: James Cramer | September 18, 2007 03:58 PM
Yeah, find me something offshore
Posted by: AJ | September 18, 2007 04:00 PM
I'm so pissed (mainly about my huge losses on the short side) But I'll have the last fucking laugh Bernanke.
You want moral Hazard, I'll fucking give you moral hazard. Me and all of my mini-baller friends will be borrowing a credit card providers will allow and using the money to speculate in the market (which, as I just proved we are not very good at). When the bill comes due and we don't have cash because bonus are 75% lower or we've been laid-off this Joke will be on you, Bernanke. Until then open fucking tab at Ulysses.
Bokay? Everyone here with me? Peace.
Posted by: Random Banker | September 18, 2007 04:08 PM
offshore:
http://thorntree.lonelyplanet.com/messagepost.cfm?postaction=reply&catid=30&threadid=1364075&messid=11962944&showall=true
Posted by: Anonymous | September 18, 2007 04:11 PM
Called that wrong. carney and I were were solid 'no cut' clowns. We obviously do not pack the gear to be even mini-ballers.
Posted by: MSM Hack | September 18, 2007 04:23 PM
"I'm so pissed (mainly about my huge losses on the short side)"
Hey why don't you write a book about your unprofitable experiences in financial speculation. I think you could get a certain famous stock operator to write a foreword for you.
Posted by: Anonymous | September 18, 2007 04:25 PM
I wonder if Tim Sykes is masquerading as Random Banker
Posted by: Anonymous | September 18, 2007 04:35 PM
No I'm not Tim Sykes, though I feel like him today.
This morning I felt like a genius who was going to perfectly play the sell off that would have ensued a 25 bp cut. Now I'm sitting here with a portfolio full of out of the money puts 3 days from expiration. Net Net I'll be fine since I have a lot of off setting long dated calls. But losing 20% of your portfolio in one day is nerve racking, just ask Goldman Global Alpha.
That's it, I'm going to take a nap under the table in the conference room.
Namaste, Peace.
Posted by: Random Banker | September 18, 2007 04:49 PM
I don't think Sykes would dare show his face at Ulysses (or would he, hmmmm)
Also, is the tab under the name "random banker" or otherwise? These are important questions that MUST be addressed!
Posted by: Anal_yst | September 18, 2007 04:53 PM
Bernanke really F'd the pooch on this one. Sell USD, sell stocks, buy gold. Yes, I've done all of the above this afternoon (not the pooch though).
Posted by: Ergodicity | September 18, 2007 05:08 PM
Jesus Jones and Mary!!!
The table has been set for Hillary's Carteresque 70's economy. This time with guaranteed free ED pills.
Posted by: Anonymous | September 18, 2007 05:30 PM