Crisis Diary as it unfolds ….

Fed drops the pants and goes all in

Okay, so finally Fed fired the last ammo left in its weaponry and dropped the target funds rate to zero. That’s as far as they can go. On top of it, Fed also announced that they are going to buy all kinds of shit that no one else wants on their balance sheets. In short, Fed has dropped its pants – the last piece of clothing it’d had- and came out all open in desperate effort to save financial system from imminent implosion. Possibly, the only thing on Fed’s mind while making this historic decision was the lost decade in Japan in deflation and liquidity trap. Japan was too late to respond and drop the rates to ground-zero and more importantly¬† japan failed to effectively manage interest rate expectations. Fed has certainly done the first thing and Fed probably wants to do the second by buying longer term treasuries to keep long term rates low as well.

Well, so far so good. But no matter what Fed does as a part of monetary policy, unless it is supported by equivalent fiscal stimulus, seems like it may not prove effective enough. Because the only effect of $ printing press by Fed so far has been demand explosion for treasuries, which kinda defeats the whole purpose.

Market is definitely happy about Fed’s move and cheered the news with 350 points bump. But will the party last?

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December 16, 2008 - Posted by | Opinions | , ,

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