DAILY ECONOMIC DATA

Fed Answers Our Concerns

Below are comments on today’s Fed Announcement of its new lending facility. In addition, we are re-releasing our 2/11/08 Research Piece titled“Fed Hesitation Hurting Economy”.

The Federal Reserve announced this morning that it will lend, via auction, up to $200 billion in exchange for AAA-rated mortgage-backed securities issued by Fannie Mae, Freddie Mac, or other private banks. The funds will be auctioned weekly starting later this month and each loan will last 28 days. The Fed calls this new arrangement the Term Securities Lending Facility and the funds will be made available to the twenty primary dealers that already trade Treasury securities on a regular basis with the Federal Reserve Bank of New York.

We applaud this action, which is consistent with the view we enunciated in the attached piece, originally released one month ago. Today’s Fed action has reduced market expectations of the magnitude of future rate cuts. For example, the market consensus as of yesterday evening was that the Fed would cut the federal funds rate down to 1.75% by the end of June. Now the market expects the funds rate to only go to 2% by June.

We believe the Fed has already provided the economy with more than enough liquidity to grow at a robust rate later this year. However, igniting that boost from growth due to lower interest rates requires the Fed to convince the market it is finishing up its rate cuts. Otherwise, as long as consumers and businesses foresee much lower rates ahead, they have an incentive to postpone activity. By narrowly targeting the problems in the credit markets rather than broadly influencing the economy through additional steep rate cuts, the Fed has greatly improved its approach. The troubled financial markets are like an athlete with the wind knocked out of him. Today’s targeted Fed approach is like giving him smelling salts to get him back up, rather than the unnecessarily long-lasting effects of shooting him up with adrenaline.