Is Everyone Comfortable With Fed Cuts Closing?
What's up with the Fed this week? They will almost certainly cut rates a quarter point and signal that the period of cutting rates is coming to a close. The bond market believes this; look what happened to yields on the 2-year note last week.
The currency market thinks there might be something to this: the dollar's decline has stopped, and indeed the dollar may be notably undervalued here, particularly if the modest slowdown in Europe accelerates and the ECB is forced to cut rates.
What's interesting is the equity market response; stock traders seem comfortable with the idea that the Fed is stepping away. They are frightened by $120 oil and rapidly rising grain and plastic prices, putting pressure on two important industries.
What else will they do? Will they reduce the TSLF (term securities lending facility)? That’s the weekly loan facility that offers treasury securities for a one month loan against other collateral. Demand has not been as strong as some anticipated –the Fed certainly don't want dealers to think this program is a permanent source of funding.
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