The FED’s Next Move

Jan. 25, 2008

Ben Bernanke “The Catcher In The Rut.”

The Open Market Committee will meet again Tuesday 29th and Wednesday 30th. They are scheduled to release their next statement Wednesday at 2 PM Eastern Time. What will it be?

Lets focus on the Tuesday January 22 statement lowering the target rate with 75 points:

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; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

Let’s focus on the dissenter, William Poole. Dissenting is kind of drastic, usually they agree at least outwardly, keeping a united front. The whole point of the extra meeting was a show of confidence, dissenting goes against confidence. Dissenting to this was probably no easy matter on Monday January 21. Intensive telephone calls. We should assume that all the others at least listened to Poole’s arguments before deciding.

Let us place ourselves in the situation.

Most likely it was Ben Bernanke himself that proposed the action to be taken. Then he faced dissent. Everyone talked to each other, probably not just one conference call but most likely several. This was a drastic move. I believe there was some mitigation here.

“Hey, look, we’re meeting in a week. Lets not burn all our gunpowder now.” This leads me to think that Ben Bernankes pre-mitigation proposal was for an even higher rate cut. Probably 1 percent I would say, 125 points seem like a weird proposal, I think he said 1 percent. So, in a process of a bit of mitigation they agreed on 75 points, and to keep the window open for more at the next week meeting, probably the last 25 points that Ben suggested.

Assuming this is right this tells us one very important thing. Ben Bernanke is scared. He is not only 75 basis points scared; he is 100 basis points scared.

At the next meeting they will look at how the market has faired so far. As of now, it looks like they will congratulate themselves on keeping off the panic selling they saw in Asia and Europe. Question then is, will they cut further?

Remember the next scheduled meeting is then due March 18! That is 51 days out. 51 days is a long long time right now. And Poole will clearly state his dislike of another unscheduled rate cut.

Ben Bernanke being scared will opt for another big cut. Perhaps even a very dramatic 75 point cut again, or 50 points. Yet, if the market keeps up pretty good, this will seem too much. Again, mitigation.


If the market keeps up, and stays up until Wednesday January 30th, at 2 PM, I believe they will mitigate it to a 25 basis points or 50 basis points cut. I believe Ben will insist on a cut, so a cut there will be.

If the market goes into panic mode before Wednesday at 2, the mitigation will stand between 50 basis points and 75. I do not believe a 75 cut will get the vote. “Lets try 50 and see how the market responds.”

Most likely then, 25 or 50 points, based on how the market goes up until then. Most likely 50, that is also what the futures markets factor in.

The market knows this, and by this the market will be held in suspended animation until the decision is out. This is terror balance of a high order.

You vs. Ben Bernanke.

The rally, should there be one, will be very short lived this time (short of a dramatic 75 point cut). It is for the most part already factored in.


In the year of our Lord 2008 after 2 PM Eastern Standard Time on the month of January 30th after 60 years of credit expansion, the safety net is removed for 51 days.

It will take more than just a little bit of selling for the FED to come out again, it will take panic selling. Panic selling may set in at any time.

Hans Lysglimt

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