Market Commentary

Around 2:15 today the Federal Reserve will issue its post meeting statement.
December 16, 2009

Around 2:15 today the Federal Reserve will issue its post meeting statement.  It is universally expected there will be no change in monetary policy with the Central Bank stating its intent to maintain its benchmark interest rate at “exceptionally low levels” for an “extended period of time.”  There has been a unanimous chorus of Fed officials making this point.

The hallmark of this crisis is the velocity of change.  I believe this crisis began in earnest during August 2007.  Policy makers at their August 7, 2007 regularly scheduled meeting stated inflation was their “predominate policy concern.”

Ten days later the Fed lowered the discount rate by 50 basis points in a rare intermeeting move stating “the downside risks to growth have increased appreciably.”  What did the Central Bank miss or what changed so radically in 10 days within a $14 trillion economy?

Less than a month later the Federal Reserve began its interest rate campaign that lowered the overnight rate from 5.25% to around 0.00%.

As per Bloomberg the average fed funds rate for the last 25 years averaged about 5%.  What are the odds the Bernanke Fed might close this gap between 0.00% in 5.0% in “relatively quick measure?”  What happens if December’s job data, released the first Friday in January, is considerably stronger than the consensus view?  Will the Central Bank act in a rare intermeeting move and increase rates?

Wow! What a radical view!  Following the release of November’s employment report fed fund futures—a gauge of market sentiment---began discounting a March increase with even some activity in the January futures.

I am not suggesting the above will occur but only writing that such an occurrence would be consistent with this crisis of the unexpected occurring.  Fed statements and forecasts missed the onset of this crisis.  Will it be bookended by the Fed missing the conclusion?

 As noted before never has the yield curve been this steep.  Never has excess bank reserves been so large.  Never has this much liquidity been forced into the financial system.  Never has there been almost near universal agreement of the onset of the “New Normal” which I believe is only the reversion back to the “Old Normal.” 

Thirty months ago never has yield curve been inverted for such a prolonged period of time.  Never was bank credit extended as it was.  Never has there been near universal acceptance that diversification has reduced risk to minimal levels.

There is little I can write about yesterday’s data or market activity.  On balance the data was around expectations but succumbed to a late day selling on inflation fears.  

Last night the foreign markets were up. London was up 0.25%, Paris up 0.85% and Frankfurt up 1.10%.  Japan was up 0.93% and Hang Sang down 0.93%.

The Dow should open moderately higher on optimism that the Fed will keep interest rates at a record low to sustain the recovery.   The 10-year is up 1/32 to yield 3.58%.