The FEDs next move – Updated

The FEDs next move – Updated Jan 28.

The case for no rate cut this time.

The market fell Friday. Dow down 1.38%, NASDAQ down 1.47% and S&P500 down 1.59%. As brought up on, Friday selling can give more selling on Mondays as investors have time to think and place sell orders over the weekend.
The market is on edge. Massive selling looms and could be triggered at any time. Yet, no one really knows what the FEDs response will be.

This has become a terror balance of a high order between the market and the FED – with you caught in the middle dear reader.

The market anticipates that the FED will lower rates again by 25 or 50 basis points, some even bet for 75 points. They might be in for a surprise.

January 25. I to predicted the FED would lover the rate regardless; I have now changed opinion, provided that the market keeps up.

Why? Let’s think like the FED. Oftentimes the threat of action is more effective than action itself. The FED has shown it will take drastic action as needed. In one way Ben Bernanke has given the market a strong show of resolve and power.

If the FED lowers rates by 25, 50 or 75 points now, and in a few days the market starts sliding anyway, that’s a vote of non confidence for the FED. It will be very apparent, why risk that.

Keep in mind; the FED has achieved what it wanted in the short term, to stop the Tsunami of selling that started in Asia on Monday. Provided that the market does not plunge into the abyss before Wednesday at 2 PM Eastern a new rate cut is not really needed. The FED will want to keep its gunpowder dry.

Instead, what I would do is to issue a very strong statement. “The FED stand ready to take forceful action again. At any time.”

This will keep the market guessing.
This will keep the market suspended.
It would halt selling.
It would encourage continued buying.
It would restrain shorting.
Any short speculator, like myself, will think twice and trice.
Positions could be wiped out, obliterated at any time.

Personally I would rather have another 75 point cut now, than being suspended into uncertainty this spring, a terror balance this is.
And so, yes dear reader I have come to conclude that my own fright of living in rate cut terror is exactly what Ben Bernanke would want, it works.
I can feel it in my spine. My personal unease is proof that it works.
You have the same unease there if you just close your eyes and feel for it.
It does not get any closer than this my friends.
Look yourself in the mirror; it doesn’t get any more real than that.
Rate cut terror.
This is what Ben Bernanke wants.

That is why this is what we’ll get.

Like a master Tao practitioner Ben Bernanke can achieve what he wants by just doing nothing.

”Practice not-doing. And everything will fall into place.”
The Tao Te Ching, chapter 3.
A strong statement will do the job; somewhat ambiguous even better.
That’s why I have come to expect no rate cut at all, just a strong statement.
Provided the markets hold up decently until Wednesday at 2 PM Eastern.

Hans Lysglimt

Also see John Mauldins thoughts on this.

This entry was posted in Finans. Bookmark the permalink. Both comments and trackbacks are currently closed.