Federal Reserve Pushes Rates Down to Zero

Top Line: Do you need more proof that the market is headed higher? The Fed has just lowered interest rates to virtually zero and promised to do whatever it takes...

Here is a (new) paragraph from their statement:

"...The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity..."

As the Fed was deliberating on what to do about interest rates the last couple of days, the market was expecting at least 50bps as we mentioned in yesterday's post title. Of course, a cut of 75bps would even be better. The Fed decided that 75bps wasn't quite enough so they have stated that their target is between 0 and 25bps. The market was actually surprised by this news and pretty much rallied from the moment the news hit the wire. By the end of the day the Dow had cruised up 360 points.

Here we are with the Dow still sitting under 9000. Can it now punch through it so that it sticks this time? The round numbers for the Dow seem to provide some trouble and 9000 is no different. This is nonsense because it's just a number but the market has respected this level for a several weeks now. We think it's just a matter of time before we get over 10,000 so yes we think the 9000 will soon be behind us.

The Fed cut rates and the dollar dropped as it should have. Gold jumped $20 right after the news, again, as it should have, if not more. Then there was the Treasury bond market which again defied reality by jumping a bunch in the wake of the Fed's news. All we can say is that the price of these bonds is dizzying and should drop dramatically. The higher they go, the scarier they get. Justification to buying these can not be found.