As hinted at weeks ago, the Fed today took action to inject more liquidity into the market in a desperate attempt to stave off the now inevitable recession (IMHO). It seems they are now driven by fear, like American politicians and consumers, only reacting to events… and reacting too late.
The Wages of Financial Sin
“The western world has embarked on a speculative journey for which all the historical precedents are ominous.”
Make no mistake about it – if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.
Fortunately, Federal Reserve Vice Chairman Kohn, in a November 28 speech, made it clear that the Fed is getting ready to act. He acknowledged that a change in market conditions had occurred that posed a threat to economic activity, and stated that uncertainties about the economic outlook were “unusually high.” HCM expects a 50 basis point cut in both the Fed Funds rate and the Discount Rate at the December 11th meeting of the Federal Reserve’s Open Market Committee accompanied by a statement confirming that the central bank will endeavor to remain ahead of the curve.