[DcifrThs]

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I said hold steady but the correct answer is probably a 0.25% cut.

I said hold steady becaue I interpret (perhaps wrongly) the surge in discount window lending reported last night as a sign the FED's emergency discount window rate cut on August 17th is accomplishing the objectives the FED wanted.

Of course, one can easily make the argument that if banks are using the discount window, then there's still turmoil in the money markets that requires additional stimulus.

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nowhere in the fed's responsibilities lies solving market turmoil.

in fact, the fed funds rate shouldn't move at all if the only worry is turbulence in the money markets.

turbulence in the money markets comes from:

- interbank rates higher than policy rates by a wide margin. this comes from banks not wanting to lend to each other. they don't want to lend to each other because they don't know how much money they'll need for their own purposes AND they don't trust other banks/collateral provided by other banks for those loans.

- money market mutual funds are being sold (investors are seeking redemptions) into this market and many providers have been using asset backed commercial paper (ABCP) backed by subprime mortgages markets to generate returns. this generates more pressure on money markets as people flee anything associated w/ the "contagion"

- the whole source of this problem of course comes down to the subprime mortgages and their use. many of them were securitized and given high ratings by ratings agencies and purchased by tons of investors worldwide. those ratings proved possibly to be wrong as expected defaults rose and prices plummeted.

risks that were thought to be diversified and bore by willing investors were actually obfuscated and the source of market wide paranoia.


so, the fed can't really do much more here than it already has done.

using the discount window is a good thing now (relatively speaking lol)

Barron