Interest Rate Roundup

Wednesday, January 09, 2008

Market gets ready for Ben Bernanke

Fed Chairman Ben Bernanke is on the speaking circuit tomorrow. He'll be talking in Washington at 1 p.m. on the financial markets, the economic outlook, and monetary policy. What's funny is how the market is clearly preparing for his comments ... by rallying. The stock market is sharply off its lows (around 200 points), bond futures have given up a nice chunk of their price gains, and many financial shares are on the up and up.

If this looks eerily familiar, it should. The Dow tanked 207 points on 8/14 and another 167 points on 8/15. Then on August 16, 2007, it was really getting crushed. But on no apparent news, in the middle of the day, the market reversed and the Dow finished the day 300 points off its low. And in what was surely a coincidence, the Fed cut the discount rate by 50 points the very next morning. That sent the market up another 233 points.

Not to sound like a conspiracy theorist or anything, but am I the only one who thinks an intermeeting rate cut could be coming ... and that the news just might have "leaked" again? The only other reasonable explanation is that everyone is HOPING for a cut, and getting positioned for it. That positioning, coupled with an oversold stock market, could account for a big intraday rally. I suppose we'll know soon enough.

One last thing: It's worth pointing out that past Fed cuts have certainly had a short-term impact on stocks and rates ... but not a long-term one. The Dow rallied 13.4% from its intraday low on August 16, but ultimately gave just about all of that rally back. Then it climbed about 8% from a late-November low, which was driven by expectations for a big December 6 cut. We just undercut the late November Dow low yesterday. And then there are all those cuts in 2001-2002, which didn't do anything for stocks (though they did help inflate the largest real estate bubble in the modern history of this country!)

By the way, the two-day Fed meeting this month is January 29 and 30, not January 30 and 31 as I posted earlier. My mistake. Here's a Fed web site with the full 2007 and 2008 meeting schedule.


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