"Bernanke put" in play
Bernanke put: Fed action to drop the Fed Funds rate on September 18 predicated on a worsening economic scenario
CNBC had been lauding Bernanke's comments to the Fed retreat this morning the most important speech thus far in his tenure as Fed Chairman, but it was anticlimatic as expected. This is a good, boring one sentence recap excerpted from David Gaffen @ WSJ Marketbeat:
“We’ve got the impression that he’s very much of the view that not the Fed’s job to bail out financial markets when they get in trouble but should only respond to the economic outlook,” says Stephen Stanley, chief economist at RBS Greenwich Capital.Frankly, Bernanke has been consistent with his message. The "Bernanke put" is real... on September 18, if the economy continues to sustain itself and the stock markets aren't dropping drastically, the Fed will have their excuse not to drop the Fed Funds rate. During the week before September 18, if this calm scenario is in play and the Fed seems to be signaling no rate cut, the stock markets will drop to reflect the vanishing rate cut. Today, traders have priced the market for a rate cut:
Simply put, the market has profound power to force Bernanke's hand, so the rate cut will be predicated on what happens over the next few weeks...Yesterday, the November [Fed funds futures] contract closed at a yield of 4.655%, betting on a half-point cut and a 38% chance of a 0.75 percentage point. The December contract’s implied yield was 4.615%, which, because the December meeting is on the 11th, the monthly average for the funds rate, should the Fed cut to 4.50%, would be 4.58%, so the current yield puts an 85% chance on a cut to 4.50%. Yesterday, the closing yield was 4.536%, which fully prices in a cut to 4.50% and even put low odds on a cut to 4.25%. (For a primer on figuring this out, see Real Time Economics.)
btw, today's market is up primarily due to the Bush announcement for assisting subprime homeowners... this is an indication of political pressure to help the housing markets, which is synergetic and consistent with a rate cut strategy.
Have a nice Labor Day Weekend
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