Fed brings rates down to near zero...
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In This Issue..

* The Fed fires its last bullet...

* Euro breaks back above $1.40...

* AUD and NZD rally...

* Happy Birthday Jen...

And Now... Today's Pfennig!

Fed brings rates down to near zero...

Good day... The 'noise' from the street which I wrote about yesterday turned out to be correct, as the FOMC cut 75 basis points to put the Fed Funds target at .25%. The US now has the lowest interest rates in the industrialized world, even below those in Japan. The dollar lost ground quickly after the announcement and continued to fall overnight to a 13 year low vs the yen and the weakest vs. the Euro in 4 months.

With both Chuck and Frank out of the office, I fielded the calls from reporters after the FOMC cut, and the most popular question asked was what the near zero interest rates would mean for the man on the street. Well it was great news for those on Wall Street, but I told the reporters that the rate cut really wouldn't have much of an impact on US consumers. After all, interest rates at 1% weren't stimulating the banks to start lending so why would .25% rates cause any change?

Fed Funds have been trading at around .25% for some time, so this move by the Fed simply moved their target rate closer to the actual market. In addition, the Fed can't really impact the Libor rates, which most loans are now tied to. So yesterdays interest rate move was largely for cosmetic purposes. Chuck was sick with the flu yesterday, but sent me a quick note after seeing the news from the Fed.

"So... The Fed goes 75 BPS... Japan now has higher interest rates than the U.S.! How is that possible? How many times must I repeat that it's not the COST OF THE CREDIT... IT'S THE AVAILABILITY OF THE CREDIT! That's causing the Credit Crisis!

Well... I saw yen trading below 90 yesterday, less than 5 whole figures from the 85 that I said yen could trade to 2 years ago... I know, I'm always early on these things! There was good news from the Japanese Ministry of Finance (MOF) yesterday... Seems they are not interested in intervening right now... The MOF's head guy, Nakagawa, had this to say...

"We're not considering intervention at all at this time," Nakagawa told reporters in Tokyo today. I'm not that concerned about today's yen moves."

When I woke up last night to look at the currencies... And what to my wondering eyes did appear, but the euro trading very close to 1.41! Oh, those of little faith and patience that sold into the weakness, like catching a falling knife!"

Yes, all of the WorldMarket investors who claimed to be 'long-term' but bailed out after the dramatic dollar rally are probably kicking themselves right about now. Markets like these are a great illustration of why investors need to stick to their diversification strategies, and not try to time the markets.

So Chairman Bernanke has used up all of his remaining ammunition for the main weapon against the economic crisis, and now has to move to other less proven methods to combat the crisis. These 'quantitative' easing methods which the Fed will now use are unproven, but they are all that they have left. The Fed pulled the first new weapon out yesterday with a pledge to buy unlimited quantities of mortgage backed securities. They hope that by purchasing these securities, they will be able to force mortgage rates lower. But as Chuck points out above, it isn't the cost of credit, but the availability that is the big problem.

The problem with these new untested financial weapons is that their longer term impacts are not known. I can assure you of one thing, the new methods suggested by the FOMC will all lead to higher inflation. Most of the press surrounding the announcement suggested that inflation is no longer a problem. And the data released yesterday supports this view, as CPI fell 1.7% MOM in November, bringing the annual change in core prices to just 2%. So US policy makers have decided to concentrate on getting the US economy growing again, with no consideration of the long term inflationary effects of their policies. The Fed is pushing the printing presses to their limit, and while oil prices have kept prices down for now, inflation is still alive, and is waiting just around the corner.

The value of the dollar fell across the board yesterday, but the yen was the biggest mover falling to 88 yen/dollar. The latest move puts the total yearly appreciation of the yen at 26% vs. the US$. Japan's Finance Minister threw water on the yen's rally said the government is prepared to take steps to help their economy. But we haven't seen any intervention this morning, so the yen has held onto its gains.

Australia's dollar rose to a two month high and the kiwi gained on purchases by investors looking for higher yields. Currency markets are starting to return to trading on fundamentals, and interest rate differentials are one factor which traditionally determines currency rates. It looks like the AUD$ has a green light to move back toward .75 while the kiwi will probably move above .60 before year end.

The currency markets rallied dramatically as they seem to have finally come to the realization that the US dollar is not the 'safe haven' which they thought. Many of the stories and opinions which are now coming across my desk suddenly agree with what we have been saying for some time, that the fundamentals of the US dollar are very weak.

Currencies today 12/17/08: A$ .6915, kiwi .5788, C$ .8263, euro 1.4060, sterling 1.5285, Swiss .8971, ISK 177.82, rand 9.9574, krone 6.7496, SEK 7.8235, forint 189.35, zloty 2.9103, koruna 18.718, yen 88.79, baht 34.57, sing 1.4575, HKD 7.7501, INR 47.6575, China 6.8357, pesos 13.01, BRL 2.346, dollar index 80.20, Oil $44.02, Silver $10.98, and Gold... $855.05

That's it for today... Sorry for the short Pfennig today, it wasn't for a lack of material, but I am having to type with one hand this morning. As I wrote a month ago, I am remodeling our basement, and my wife has set Xmas eve as my deadline. Last night I was working on putting in some baseboard and tore my left hand up pretty good with a miter saw. I spent a good part of my night in the emergency room, and will head to a plastic surgeon later today. Needless to say, I finally succumbed to my wife's suggestions and a contractor is headed to my house this morning to finish things up.

Before I sign off, I want to wish my co-worker and good friend Jennifer a happy birthday!! Jen is our trader when Chuck is off the desk, and I've worked with her for close 15 years. In honor of Jen's birthday, we are having a food day today. You got to love food days!! Hope everyone has a Wonderful Wednesday!!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-17-2008 9:36 AM by Chuck Butler