Wednesday, December 12, 2007

Wow, that hurt

A very unexpected move yesterday by the Fed. 25bps cut for both the Fed Fund target rate and the discount window.

The market just jumped off the edge into oblivion after the announcement. However, I don't believe that 25 rather than 50 bps to the Fed Fund target rate is really the big issue. Instead, I think its the 25 rather then the expected 50bps cut in the discount window that really caused the issue.

There is a large credit problem for banks right now, and a 50bps cut would have allowed them to get that credit cheaply.

In the coming days, the clear market reaction is that more cuts are needed, and the Fed looks poised to respond. I think the market will rally again before the year is over.

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