Tuesday, 21 August 2007

Is it time for the Bernanke put?

So the fed cut the discount rate flooding the markets with badly needed liquidity. The financial markets applauded the move and rallied accordingly. Confidence has been restored to the credit markets and the stock market can resume it's relentless march to ever new highs. Right?

If only it were that simple. The chart below, courtesy of MGETA is not supportive of investors with confidence.

On Monday the yield on three-month Treasury bills fell to a low of 2.4%, 134 basis points below Friday's close – a sharper fall than during the October 1987 stock market crash. Not shown on the chart is the 1 month treasury which fell a whopping 160 basis points to 1.34%.

Whilst the cut in the discount bought the Fed some time before cutting the federal funds rate, Monday's flight to safety suggests the Fed's actions are not having the desired effect on sentiment in the credit markets.

A lot can happen between now and the next FOMC meeting in September, however the pressure on Bernanke to cut the fed funds rate is building. Is it time for the Bernanke put?