Operation Twist or Quit

Fed Chairman Ben Bernanke announced on Wednesday that he would shuffle up the Fed's portfolio, selling $400 billion worth of shorter-term securities and buying longer-term ones to boost the economy. The latest move is aimed at lowering long-term interest rates and prompting more investment


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Fed unveils new US$600bn bond purchase program

The Federal Reserve announced plans to pump hundreds of billions of dollars into the US financial system in yet another unconventional effort to try and jolt the US economy out of a deep slumber. The Fed will, in effect, print money to buy Treasury bonds worth an additional US$600bn by June 2011 in a bid to lower long-term interest rates and avoid deflation. The action should make it cheaper for Americans to borrow money, take out mortgages or refinance their houses, and for businesses to borrow funds in order to expand. But the big question remains whether they will take the bait or not.

Fed resumes policy easing as US economy slows

The US Federal Reserve eased its monetary policy further, even as it downgraded its economic outlook amid growing fears that the world's largest economy is losing momentum. Fed's policymakers agreed to begin reinvesting proceeds from expiring mortgage-backed securities in longer-term Treasuries, to prevent its massive balance sheet from shrinking. "To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the FOMC said in a statement.

Fed leaves rates steady...sees weak US recovery

The Federal Reserve indicated yet again that it is no hurry to raise interest rates, saying that the US economy remains weak even though the worst recession in decades appears to be winding down. The US central bank reiterated its long-standing stance to keep interest rates exceptionally low for an extended period because it expects only a weak recovery. As anticipated, the Fed policymakers maintained the target range for the federal funds rate at 0 to 0.25%. "Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the FOMC said in a statement.

Economic activity has continued to pick up and conditions in financial markets were roughly unchanged, the FOMC said. It added further that activity in the housing sector has increased over recent months. "Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," the FOMC said.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales, the FOMC said. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the FOMC expects inflation to remain subdued for some time.

Fed unveils mega US$1 trillion financial stimulus

The Federal Reserve said that it will employ all available tools to promote economic recovery in the United States and to preserve price stability. The Federal Open Market Committee (FOMC), the central bank's policy-setting arm, said it will maintain the target range for the federal funds rate at ZERO to 0.25% and anticipates that economic conditions are likely to warrant exceptionally low levels of federal funds rate for an extended period. Separately, the Fed decided to purchase up to US$300bn of longer-term Treasury Securities over the next six months to help improve conditions in private credit markets. It will increase the size of the balance sheet further by purchasing up to an additional US$750bn of agency mortgage-backed securities to provide greater support to mortgage lending and housing markets. This brings the Fed's total purchases of these securities to up to US$1.25 trillion this year. The Fed will also increase its purchases of agency debt this year by up to US$100bn to a total of up to US$200bn.

The Fed has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The FOMC said that it will continue to carefully monitor the size and composition of the Fed's balance sheet in light of evolving financial and economic developments. Prices of a slew of commodities surged, led by gold and crude oil as the Fed's decision to pump more than US$1 trillion into the US economy stoked fresh fears that inflation could stage a come back. Gold prices soared 8% to their highest close in nearly a month, while oil jumped above US$51 a barrel. The Fed's bond-buying program will pump hundreds of billions of dollars into the US financial system in an effort to lower interest rates and boost lending. But the plan could also weaken the dollar and trigger inflation going ahead.

Gold is traditionally used by investors as a hedge against inflation, so demand for the precious metal tends to increase when the dollar is weak. On Thursday, the dollar sank against other major currencies. A weaker dollar in turn is bullish for commodities. Copper futures hit a four-month high and grain prices rallied on the Chicago Board of Trade. While it is tough to say whether inflation will actually start shooting up due to the Fed printing unprecedented amount of money, fresh fears over inflation will most likely drive prices for commodities higher, especially if the dollar remains under pressure.

Alan Greenspan - Fed didn't do it!

The Fed Didn't Cause the Housing Bubble

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

More at WSJ

US Fed cuts rate by 50 bps

The Federal Reserve on Wednesday, October 29, cut a key interest rate by 50 basis points (bps) in an attempt to revive an economy ailing from the most severe financial crisis in recent times.

The central bank slashed its target for the federal funds rate, the interest banks charge on overnight loans, to 1%, a low last seen in 2003-2004. The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.

Further rate cuts would make it very inexpensive for banks to borrow from one another. The Fed is hoping that low rates, along with efforts to increase liquidity, will spur greater lending and borrowing, unfreezing credit markets thereby boosting its economy.

Fed holds the interest rates steady

The Federal Reserve stared down pressure from markets and held its base lending rate at two percent Tuesday, suggesting the economy can muddle through the current turmoil without an immediate rate cut.

The unanimous decision by the Federal Open Market Committee defied expectations of traders in the futures market of a quarter-point reduction in the federal funds rate.

The FOMC cited "strains" in financial markets but said that the world's biggest economy is likely to muddle through with the current low rates and other measures to increase liquidity.

The move came as a major surprise to traders, since the futures market had been pricing in a 92 percent chance of a quarter-point cut in the rate hours earlier in view of the rout in markets due to the collapse of Lehman Brothers and possible death spiral at American International Group.

"To read their statement, you would never know the sky has fallen in on Wall Street," said Ian Shepherdson, chief US economist at High Frequency Economics.

"In our view this statement is either very brave or very reckless. Not to acknowledge the catastrophes of the past few days runs the very serious risk that the Fed will be seen as Nero, fiddling while Wall Street burns."

Scott Brown, chief economist at Raymond James & Associates, said the decision signified "a lot of uncertainty" about the economic outlook and "allows the Fed to buy some time”.

"Fed policy has an effect on the economy with a lag and the rate cuts earlier this year should be having an effect later this year," Brown said.

"There is always some second guessing. People will say 'What does the Fed know that the rest of us don't?' Now people are saying that maybe things aren't that bad."

The FOMC statement noted that "strains in financial markets have increased significantly and labor markets have weakened further" since the last meeting in August but added that "the downside risks to growth and the upside risks to inflation are both of significant concern."

But it added that "over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."

The central bank earlier Tuesday injected USD 70 billion of liquidity through repurchase agreements, a move coming on the heels of similar actions by other central banks and another USD 70 billion move Monday amid turmoil following the bankruptcy of Wall Street giant Lehman Brothers.

John Ryding, economist with RDQ Economics, said the Fed nonetheless blundered in allowing market expectations to run so high in favour of a rate cut.

"In one way, I'm happy that the Fed did not cut rates," Ryding said while adding that the Fed's "communication skills have ben far from perfect."

Ryding said the Fed was trying to demonstrate that the economy can get by with the current rate policy and that it will fight the credit crisis with alternative means of getting liquidity to institutions that need it.

"It strikes us as something of a strange time to put this principle into practice," Ryding said.

"Had the Fed taken decisive actions on liquidity facilities in the fall of last year and kept the funds rate on hold, inflation pressures would have been less than they currently are, the dollar would likely have been stronger, and the credit crisis might have been more contained."

Joel Naroff of Naroff Economic Advisors said the Fed decision appeared "reasonable" under the circumstances.

"The problem is not the level of rates but liquidity and the willingness to lend," Naroff said. "If the Fed had cut the funds rate, it would have lowered costs to financial institutions but not caused them to lend a whole lot more."

59% Americans unhappy with stimulus package: Experian

When asked how consumers plan to use their rebate check from the federal economic stimulus package, 19% said they would pay off a debt, 16% said they would pay utility bills, and 10% said they would apply the proceeds toward home repairs.

An Experian Consumer Direct poll shows that more than half of Americans feel the recently signed US$152bn federal economic stimulus package is a short-term solution for the troubled U.S. economy, while 32% feel the package will cause more Americans to reinvest in the economy. The survey also gathered consumer attitudes regarding their 2007 federal income taxes.

When asked how consumers plan to use their rebate check from the federal economic stimulus package, 19% said they would pay off a debt, 16% said they would pay utility bills, and 10% said they would apply the proceeds toward home repairs.

"The current credit crunch has forced many consumers to reprioritize their spending habits and to more effectively manage their personal finances," said Ty Taylor, group president of Experian InteractiveSM. "This is evident in the survey results, as nearly 20% of Americans surveyed plan to use their federal economic stimulus package rebate to help pay off a debt."

In terms of 2007 income tax returns, 25% of respondents indicated they plan to use their refund to help pay off a debt, 15% said they would invest the proceeds, and 6% said they would use the refund for travel expenses.

"The results of the survey show that many Americans feel the economic stimulus package will have little impact on their personal financial situation," said Dr. David Algranati, director, Experian Research Services. "Sixty-two% of those surveyed said they or their family would receive little or no benefit from the stimulus package, and only 15% of consumers expect it to cause them to increase their spending."

Fed to the rescue

Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

The lending is part of a major effort by the Fed to help a financial system in danger of freezing.

Those large firms averaged USD 13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.

On Wednesday alone, lending reached USD 28.8 billion, according to the Fed report.

The Fed created a way for financially strapped investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed back a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to USD 5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make USD 75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to USD 200 billion in safe Treasury securities by using some of their more risky investments as collateral.

By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.

In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.

Fed Lifeline and IIP Slump

India's industrial output growth slipped sharply in January as high interest rates sapped consumer spending in Asia's fourth-biggest economy even as a US-led global economic slowdown loomed, data released by the Government showed. What's worse, the investment scenario in the country could be headed for some slowdown as companies struggle to raise money amid a global credit crunch and investor apathy in local primary market. The capital goods sector showed a steep decline in January over the same month last year. Consumer spending continued to struggle with the consumer durables segment exhibiting a negative growth rate for the month.

Production at factories, mines and utilities rose by 5.3% in January as against 11.6% in the same month last year, data released by the Government showed. The reading was lower than average expectations of 7-8% expansion. December's industrial production growth was revised to 7.7% from the provisional estimate of 7.6%. The manufacturing sector grew by 5.9% in January as against 12.3% in the same month a year earlier, while growth in mining and electricity too decelerated to 1.8% and 3.3%, respectively from 7.7% and 8.3% in the year-ago month. Year-to-date, industrial output grew 8.7% versus 11.2% in the same month last year.

The Capital Goods sector witnessed a steep slowdown in January, with its expansion falling from 16.3% last year to just 2.1% this year. Sectoral growth rate in Basic Goods and Intermediate Goods stood at 3.5% and 7%, respectively versus 12% and 13.7% in January 2007. Consumer Durables segment shrank by 3.1% compared to a growth of 5.3% in the same month last year. Consumer Non-durables recorded a growth of 10.1% as against 9.1% in January 2007. The overall growth in Consumer Goods was 7% in January versus 8.2% in the year-ago period. It remains to be seen whether the RBI now acknowledges the slowdown and cuts rates in April.

After last week's big losses, global equity markets received some relief this week in the form of another face-saving move by the Federal Reserve, which is desperately trying to avoid a recession in the US. The Fed and other central banks unleashed a plan to halt the ongoing meltdown across global equity markets in the wake of the correction in the US housing sector and the ensuing stress in the credit markets. The Fed said it will lend up to US$200bn of Treasury securities to primary dealers in the bond market secured for a term of 28 days, rather than overnight, as in the existing program. The new term securities lending facility (TSLF) will accept as pledge mortgage-backed securities, including federal agency debt, Fannie Mae and Freddie Mac residential-mortgage-backed securities, and AAA-rated private-label residential mortgage-backed securities. The move bolstered the mood across global markets, with the Dow Jones Industrial Average leading from the front.

However, sentiment soon turned sour after the dollar slipped below 100 yen and a mortgage bond fund of private equity firm the Carlyle Group said it had failed to seal a refinancing deal with lenders and expects lenders to take over nearly all its remaining assets. The fund said it has defaulted on US$16.6bn of its debt and its remaining borrowing is expected to go into default soon as it is unable to meet margin calls on its portfolio of residential-mortgage-backed securities. Just when it seemed that global stock markets could face another Black Day, came the announcement from ratings agency S&P that the writedowns by top global banks and financial firms could end soon. The markets rebounded on the S&P's encouraging prediction and continued the recovery after data showed that consumer prices held steady in the US last month. The CPI data fueled speculation that the Fed could aggressively cut rates when it meets on March 18.

BREAKING - FED CUTS RATES by 75 bps

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.

Fed cuts interest rates

The US Federal Reserve has decided to cut its benchmark interest rate by a 25 basis points to 4.25% to prevent the housing slump and credit squeeze from undoing the six-year expansion.

This was the third time in a row that policy makers decided to cut its federal funds rate.

The Fed's Board of Governors also voted to cut the discount rate, the cost of direct loans from the central bank, by a 25 basis points to 4.75%.

The gap with the federal funds rate remains half a point. Some economists had predicted the Fed would reduce the spread between the two.

The change "should help promote moderate growth over time,'' the Federal Open Market Committee (FOMC) said in a statement after meeting on Tuesday in Washington.


Following is the press release issued by US Federal Reserve

The Federal Open Market Committee decided to lower its target for the federal funds rate 25 basis points to 4.25%.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25 basis point decrease in the discount rate to 4.75%. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

US Fed cuts rate by 25 bps

The Federal Open Market Committee (FOMC) decided today to cut the federal funds rate by 25 basis points to 4.5 per cent.

"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," FOMC said in a release.

"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully," the it added.

What do you plan to do after Fed decision

BUY BUY BUY baby! 133 (39%)

Sell to suckers! 112 (32%)

Hold like generations old Gold ! 95 (27%)

Votes so far: 340

Fed cuts 50 bps

The US Federal Reserve cut its FED Funds Target rate by 50 bps from 5.25% to 4.75% indicating - "Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time".

In a related move it also cut the Discount rate by 50 bps to 5.25%.

Although the Fed Funds futures were indicating a 50.0% probability of a 50 bps cut, the broader market was expecting a 25 bps cut. So a 50 bps cut is definitely something to cheer about - and how!

The Dow gained 2.5% rising by 335 points. The 2 Year treasury yield crashed 15 bps to end at 3.98%. The dollar got knocked out to an all time low flirting with the 1.40 to the Euro mark. Financial stocks heaved a huge sigh of relief and posted strong gains across the board.

It is also great news for the 'export to US' dependent emerging economies - the Nikkei, Hangseng and the Kospi are up by 3.0% each. India would follow suit.

Concerns Remain - Inflation hawks have a different take on it -

With crude oil over $82/Brl, food inflation picking up, metals trending higher and a general higher inflation scenario around the globe - the 50 bps cut didn't enthuse the inflation hawks. They immediately reacted by sending the 30 yr Treasury bond yield up by 5 bps. Even the 10 year bond yield was up 5 bps after the decision. The US treasury yield curve is at its steepest. The spread of the 10 year yield over the 10 year inflation protected securities widened to 2.35%, an indicator of the expected inflation. Even Gold hit a 16 month high trading at $725 tracking the fall in dollar value and the overall concerns on inflations.

The euphoria should continue for a day or two and then what - Does it indicate the start of a long drawn easing of interest rates in the US?

The US economy has shown moderations in the first half of this year. Housing activity continued to worsen and employment slackened. Though retail sales showed a pick up last month, the general trend was one of a slowdown. Consumer confidence has been shaky. The after effects of the sub-prime mess threatened to derail the economic activity further. Credit conditions remain tight and mortgage lending activity has slowed down. The Housing industry is crucial to the US economy and the Fed sees a major risk to the economy on its deteriorating state.

One key reason for the rate cut would be to manage the amount of interest rate resets on mortgage loans happening in early 2008. Almost $520 bn of loans are due for repricing in the first half of 2008. A lower benchmark interest rate and a stable house price scenario then, would definitely aid in managing the re-pricing, without too much risk of higher delinquencies and foreclosures.

Foreclosures are bound to be higher at a time when house prices are falling and the EMI's are increasing. This cut in interest rates would lead to lenders lowering their PLR's and thus softening the relative impact of an interest rate reset. The lower lending rate could also spur new purchases of houses stabilizing the house prices.

Given this bleak scenario, the FED probably had no alternative but to cut interest rates and soften the impact. A 25 or 50 bps holds no relevance, I guess. It might need to do more if the problem worsens.

But does it alleviate the Credit market problem - ?

Risk aversion continues in the credit market with slack demand for structured assets. O/s Asset backed commercial paper (ABCP) issuance has dropped by 30.0% and rollovers are non-existent, indicating a lack of investor interest. So in such a scenario, does a rate cut help?

Look at it this way - the credit market problem was never a problem of borrowers; it was a problem of lenders. So if a lender was reluctant to lend at a higher rate yesterday, what is his motivation to lend today 50 bps lower??

The resurgence of the asset backed market is crucial for the housing activity. Mortgage lenders need MBS buyers. With the current risk aversion scenario, the appetite for MBS tranches of sub-prime borrowers seem remote. In 2006, Sub-prime, Alt-A and Home equity loans accounted for 50% of total mortgage loans and a substantial chunk of it was packaged and sold off as MBS.

Moral Hazard -

On the other hand the rate cut opens up the question of 'Moral hazard' - i.e by cutting rates, the FED is sort of bailing out the institutions and funds. As one Bank of Tokyo economist put it the FOMC now stands for 'Friend of the Market Committee'. There are concerns even on how the cut in rates could again spur the reckless lending in search for higher returns.

Where does all this leave us?

The markets are already pricing in further rate cuts by the end of the year. The rationale being that the FED has never in its history done a rate change and then sat still. They will follow it up with some more cuts.

Despite the 50 bps cut, future rate actions would be data dependent. This was an exceptional situation and with a 50 bps increase the FED has conveyed to the markets their concerns on economic growth being affected by problems in the financial markets. It would have to be data dependent going forward. A rough calculation on the normalized Fed Funds rate (as per the Taylor rule) points to a rate around 4.75%.

A big concern is inflation - dollar depreciation, oil and food prices should keep price levels under pressure. Also, recent retail sales and consumer confidence have been stronger than expected. Over and above that - US CPI Inflation has lot of positive base effects in the coming months. And even a stagnant index would lead to higher readings on the headline inflation.

We would go for a hold on rates in October for further clarity on the economic condition.

Would other Central Bank follow suit -

If not rate cuts, they certainly seem to have put on hold their tightening spree. The BOE and ECB held rates steady even before the Fed eased and the BOJ, which was most expected to raise rates, held steady today morning. The only major economy on a tightening spree is China.

But both the BOE and ECB are more inflation hawks than pro growth. The problems in the UK housing market has forced even the BOE to lend liquidity support and guarantee retail depositors. But we don't see any rate easing by the BOE and ECB in the short term. And also their economies weren't under as much stress as the US.

And the RBI?

Way to early to even think of a benchmark interest rate cut. The growth is strong, Credit off-take is picking up and concerns remain on inflation. Depending on the liquidity and credit off-take situation the RBI has the leg room to alter the CRR and the SLR ratios in the coming months.

Indian markets and Asset prices -

NO surprises from the way Indian asset prices would move post the rate cut. Equities are up 3.5%, the rupee at 40.25 is down 25 paise from yesterday's close, Indian long bond yields are down 5 bps and so is the swap curve.

The cut is seen to be alleviating the credit problem and also increase liquidity leading to higher flows in to emerging markets and thus to India.

But we believe that the long term impact of the sub-prime problem would be a reduction in leverage levels. Northern Rock, the UK mortgage lender, in a liquidity mess now, has an equity base of ₤3 bn and an asset base of ₤113 bn. Leverage of 37 times!! Most of the US and European investment banks also have leverage of around 20 times. Hedge Funds have known to leverage around 15-20 times on their capital. The industry would move to tighter lending standards over time and central banks would tighten prudential norms. This would impact the overall levels of leverage and liquidity.

Remember -

Leverage = Liquidity!!

Via Arvind Chari- Fund Manager, Quantum Liquid fund

Poll Results - The Fed will

Decrease by 25 bps - 253 votes (55%)

Decrease by 50 bps - 113 votes (24%)

Not change Interest rates - 90 votes (19%)

Total Number of votes - 456

Gold - Watch what Fed Does and not What they say

Gold - Watch what Fed Does and not What they say

Bernanke seeks data to fix the mess

Alan Greenspan trusted his instincts. Ben Bernanke trusts the MAQS.

For the past several days, the MAQS - a group of analysts in the Federal Reserve's Macroeconomic and Quantitative Studies unit -- have run a series of what-if scenarios on the US economy that will play a critical role in next week's interest-rate decision, according to a report on the website of Bloomberg.

"The simulations will supplement the forecast handed to policy makers at the start of their September 18 meeting, and may determine the size of the rate cut almost universally predicted by Wall Street economists," the report said.

Bernanke has championed the team's work since becoming Fed chairman in 2006 because he wants to sift through models, projections and anecdotes before coming to conclusions. His approach contrasts with that of predecessor Alan Greenspan who relied more on his own reading of conditions, and as a result probably would have cut rates to insure against a recession long before the Federal Open Market Committee (FOMC) gathering.

The FOMC will next week lower the overnight lending rate between banks to 5% from 5.25%, according to the median forecast of economists surveyed by Bloomberg. The reduction would be Bernanke's first and may be followed by at least two more before year-end, the report said.

Fed cuts discount rate

The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.

The discount rate is the rate the Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.

The central bank did not change its more closely watched federal funds rate, which affects rates that consumers pay on various types of loans. That rate remains at 5.25 percent.

The Fed last met Aug. 7 and decided to leave both the federal funds and discount rates unchanged. But since then, stocks have plunged further due to fears that some financial institutions and hedge funds were in serious trouble because of the mortgage meltdown.

Mortgage lender Countrywide Financial, for example, announced Thursday that it needed to tap an $11.5 billion line of credit because of liquidity problems. That came a day after an analyst at Merrill Lynch suggested that Countrywide might need to declare bankruptcy.

In a statement, the Fed said that it took the move to "promote the restoration of orderly conditions in financial markets."

In another statement, the central bank indicated that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.

Stock futures, which were initially trading lower Friday following another wild day Thursday, surged higher following the Fed's announcement

Via CNN