FOMC: Fanning Our Monetary Conflagration

From RealMoney:


David Merkel
FOMC: Fanning Our Monetary Conflagration
3/18/2008 2:16 PM EDT

The Federal Reserve Open Market Committee lowered the Fed funds target and discount rate by 75 basis points. The vote was 8-2, with Fisher and Plosser dissenting. The growth risk assessment is weakness.

The prices risk assessment is balanced.

Overall, FOMC makes noises about some inflation, lending markets, and economic weakness.

The 10-year Treasury yield was down 2 basis points in yield after two minutes. The S&P 500 was down 80 basis points.

We now return you to our regularly scheduled programming. The fixation is ended! Trade!

Position: none

Okay, so 75 basis points isn’t 100. 75 is still pretty aggressive, and combined with all of the other actions that the FOMC has taken, it provides some stimulus. It would provide a lot more stimulus if they stopped immunizing all of their unorthodox policy measures, but hey, they are trying for a hat trick:

  • Solve the problems in the lending markets.
  • Don’t permanently add to the monetary base, and so restrain price inflation.
  • Stimulate a weakening economy.

Personally, I think they will eventually have to stop giving with the right hand and taking with the left, but for now, they can continue this policy. It might even work if nothing else material blows up. Credit spreads are considerably tighter today, but one day does not a recovery make.