Hedgies Fear Small-Business Credit Freeze

No surprises from the Fed — that's putting it mildly. Worries about Greece, and maybe the economy, seems to have neutered the Fed completely.

Yes, no change in the "exceptionally low levels of the federal funds rate for an extended period" phrase, but we knew that. Nothing on selling their stash of mortgage-backed securities (MBS) or agency debt, nothing on increasing the rate they pay on reserves.

Biggest disappointment: not even a mild upgrade to the economy, as there was in the last release.

Okay, they said the "labor market is beginning to improve" — and on March 16, they said the "labor market is stabilizing."

Hedge fund traders say the recovery will stall on tight credit for small businesspeople. At an informal get-together with a half-dozen hedge fund traders last night, I was surprised at how unanimously bearish the group was.

The consensus: the economy would stall on the lack of job growth. Corporations cannot account for the job growth that is traditionally needed. That growth comes from small business growth. Small entrepreneurs traditionally started new businesses by borrowing $20,000 or so on their credit card — and then rolling that into a small business loan.

But that avenue is now closed to most small businessmen, because their credit has been cut off. Unless that changes, job growth will be tougher to come by.

Most feel that the Fed will not dare tighten, or even dramatically change their language, for months, with a few insisting no actual rate hike will come until 2011.

Not that rates won't rise: long-term rates will rise even more this year, even if the Fed keeps short-term rates lower, resulting in a steepening yield curve.

As for Spain, I have been asked why there was not more of a market reaction to S&P's downgrade of their debt. One trader who has been bearish messaged me, "Spain was not a surprise and was only one notch, cut to AA from AA+...many people have missed the rally and step in whenever mkt comes in despite the fact that it is up so much."

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