Who would have imagined a few months ago a sudden Fed action as it was that cut rates? How it is possible to little more than one month of that event, market expect the Fed again to repeat it in a context where the rate stands at 3% and inflationary pressures remain dormant? The truth is that this expectation is concrete. For Tim Smalls, head of operations of Execution LLC: there are some rumors in the market that the Fed could make an emergency cut. Same vision also have Goldman Sachs analysts. Beyond that there is an early intervention by the Fed, the market expected that Bernanke has very good sharp scissors that forecasts, hitherto, granted a 96% chance that the Federal Reserve scalp on March 18 75 basis points in interest rates, to bring rates to 2.25%. Even exists in the expectations of the market, a 22% probability that the cut of 100 basis points. But why are you giving this situation of stress in financial markets? For the Fed, this situation responds to certain fears about the quality of loans, mainly the mortgage, a shortage of capital within the financial system and to the increase of liquidity risk. Yesterday fears about inadequate access to capital, struck hard at the actions of Bear Stearns Co (NYSE:BSC), which fell by 11%.
Certainly these three factors act nourishing and cause that financial institutions are not very willing to make new loans because of pressures that have on their balance sheets and to seek to make greater liquidity. In the case of the hedge funds and other investment vehicles, they are being forced to sell assets for the replenishment of margin calls which is causing an increase in the volume of sales of assets that may affect the quotation of them generating a new process of replenishment of margin calls (and thus produces what is called a spiral margin). The situation was aggravated last week because these pressures affect securities market backed by mortgages guaranteed by Fannie Mae and Freddie Mac (the U.S. Government-sponsored entities.UU.). That market was until recently considered to be very safe and now, with the effects of massive asset sales recorded strong increases in spreads risk on these titles. And if left any doubt about these signs evident the situation which is going through the US economy, in a survey by the Boston Consulting Group shows that more than half of executives polled believe that the American economy is already in recession or will be in the next six months. Increasingly fewer are optimists that presaged a quick recovery of the American economy thanks to the intervention of the Fed and the plan of fiscal stimulus (it will start next May and I hope that’s not too late).
What is becoming clear is that the only thing that can be achieved by the time the Fed through lowering rates is to prevent the situation from worsening even more through deterioration in the price of assets as a result of an upsurge in liquidity problems. And the number of supporters of the inefficiency in the short-term rates the Fed policy will not only increase to avoid recession, but it now seems to be that it is increasing the number of those who believe that with this policy the Fed will lose the battle against inflation. That at least is what they think investors from bonds that are betting those who have protection against the increase of the consumer price index in the United States.UU.