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Bernanke Jumps
Posted by: Dale Franks on Friday, August 17, 2007

In case you hadn't heard, the Fed delivered a moderately surprising—and well received by the markets—announcement today. The Discount Rate was lowered by 50 basis points (0.5%) to 5.75%. No action was taken on moving the Fed Funds rate, but the fed did shell out $6 billion in 3-day repurchase agreements, to inject some short-term liquidity into the system.

This was an inter-meeting rate cut, which was why it was a bit of surprise. I think it's a hint, though, that the Fed has decided that liquidity at the moment overrides inflationary concerns.

Now, of course, the speculation will begin as to whether this is a temporary move, or whether the liquidity problem has moved the Fed into a bias towards lowering rates.
 
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Dale:
The Fed’s move absolutely does indicate a ’bias’ toward lowering rates (perhaps as early as OCT). The real issue (as John Mauldin so elegantly points out in his recent newsletter) is one of ’credibility’ in the credit markets. Wall Street investment banks and the rating agencies (Moody’s, etc) have shot a big hole in their collective ’foot’ as the result of being a little too clever in creating & selling their derivative products. Lowering the over-night lending rate will help smooth things for a while...but if the credibility gap doesn’t close (or worse widens) that landing the Fed was talking about a the last meeting will go from soft to major ’kathunk’ in a heartbeat.
 
Written By: Unscripted Thoughts
URL: http://
The derivative instruments are going to have to be bought back or recontracted with fixed rates or this crisis will remain a couple of rate hikes away from coming back.
 
Written By: Captin Sarcastic
URL: http://
Unscripted,

You may be right, but inflation is still a challenge, especially if we slow down (fewer goods and services chased by the same money supply.) Of course, that depends on how the credit meltdown affects the money supply and how the fed sees it.

That being said, I always enjoy hearing from other Mauldin readers. The latest letter was a very good synopsis of the crisis.
 
Written By: Lance
URL: http://asecondhandconjecture.com

 
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