The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.

Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The old saying that the "Fed will do what the Fed will do" has never been truer.

The Fed Watcher game of reading the FOMC announcements and meeting minutes as gypsies read their tea leaves is often unproductive.

Pandering to Wall Street...

Considering that the Federal Reserve is a private institution owned by its member banks should be the first clue that the FOMC will do whatever it takes to keep the major banks and Wall Street institutions afloat.

It seems that Bernanke and the Federal Reserve's FOMC (Federal Open Market Committee) has been pandering to the needs of Wall Street and all of its supplicants in responding to the present financial crisis.

These combined actions have resulted in ordinary citizens suffering with reduced interest rates on their bank investments and only minor reductions in their credit card interest rates.

However, for the banks the margin between what they pay for access to money and what they charge consumers and corporations has been steadily expanding. The Fed has created new and unusual methods to pump BILLIONS into the banking system at rates slightly under those charged at the reputation-tainted Fed "discount window."

It seems that the entire Fed ploy is conditioned on pumping enough money into the banking system, and by extension the brokerages who created these toxic derivatives and the insurers who guarantee the derivatives to insure a maximum rating by the ratings agencies, to allow the banks to avoid reporting their true condition and triggering concerns over solvency issues. A shell game to buy time so allow the results of  toxic securities to naturally self-resolve over time.

Even though there is a great deal of residual value in the land and structures that serve as collateral for mortgage backed securities, the Wall Street Wizards sliced and diced various levels of risk, repackaged them and induced buyers to purchase these toxic derivatives with borrowed money -- thus leveraging both their potential gains and, as it turns out, their eventual losses.

There is no liquidity crisis, only a crisis of counterparty trust...

It seems that these derivatives cannot be accurately priced and that no buyers can be found at prices which would minimize losses. Of course, the bottom feeders are all salivating at the opportunity to purchase this "residual value" paper at discount prices. What is causing the major impediment to business is that banks and others can no longer rely on the balance sheets of those who wish to do business with them, their so-called counterparties.

The Fed is attempting to resolve this situation by offering highly liquid and desirable treasury instruments as loans in return for toxic paper that is supposed to serve as so-called "collateral."  This will allow business to continue and hopefully, the situation will resolve over time.

The dollar...

On the other side we see that our trade balances are being favorably resolved by an abnormally weak dollar which is manifesting itself as an increased cost of essential energy and foodstuffs as a result of inflationary pressures. This is what is currently (apparently) moderating our economic woes. Slowing our economy to a position just this side of a formal recession.


So what is the FOMC likely to announce at 2:00 p.m. Eastern Time?

What should be done...

Capture4-29-2008-10.29.54 PM

According to my calculations, the Federal Reserve should raise the Federal Funds target rate by at least 85-basis points to achieve a neutral inflationary stance in the 5-year outlook or by 157 basis-points in the 10-year outlook. The numbers were computed using the Fed's H.15 report numbers which were published on April 29th for April 28th values. In more practical terms, the Fed would be obliged to halt rate cuts and alter their "guidance" as expressed in both the FOMC meeting announcement and the actual meeting minutes which are published three weeks after the meeting. To surprise the market, a take-back (raise) of 25-basis points would not be unjustified by the numbers.

The market moves only on "unexpected" FOMC actions...

The information shown above is known to the Fed and to any competent economist. Therefore, the likely scenario, based on a consensus opinion, already prices the "common wisdom" of the wizards into the market. Thus, only "unexpected" results are likely to move the market.

The current buzz is that the Fed will reduce the Federal Funds target rate (and probably the discount rate) by 25-basis points... although there are those who wish for a cut of 50-basis points. It is also widely believed that this may be the last cut before a period of "waiting and watching."

The consensus...

Conventional wisdom has the Fed cutting rates by 25-basis points one last time before entering a period of "wait and watch."

My view...

As I mentioned before, the only safe projection is that: "the Fed will do what the Fed will do."

What can YOU do?

Ladder and diversify your investments to insulate yourself from radical moves in the economy and any particular sector such as the financials, technology, industrials, retails, etc.

Use trusted investment advisors whenever possible.

Believe the Better Business Bureau's favorite saying, "Investigate Before You Invest."

For those who wish more information on how I calculate the Fed Watcher numbers and a copy of the actual Excel Spreadsheet, drop me an e-mail.

-- steve

P.S. Thank you very much for continuing to read my blog entries. I recently reviewed the e-mail addresses of those who subscribe via e-mail and I have noticed that my subscribers range from my best friend to other interested and diverse parties, if you can believe their e-mail addresses,  such as Minister Malik Shabazz of the New Black Panther Party. All are free to disagree with me or comment on my blog entries. All I ask is that the response is within the bounds of good taste and promotes a legitimate exchange of viewpoints. The only comments that I delete are those reported to my ISP (Internet Service Provider) as being commercial offers (SPAM). Again, thank you for reading.

A reminder from a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

The Federal Reserve H.15 Data Link

The Federal Reserve Meeting Announcements and Minutes

“Nullius in verba.”-- take nobody's word for it!

“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw

“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”

“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS

"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius

“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell