Wednesday, November 28, 2007

Federal Reserve Trial Balloons?

Compare and contrast today's Fed official statements with yesterday's:

Today (WSJ) - Though a repricing of risk "is not surprising or unwelcome," [Vice Chair]... Kohn noted that wider credit spreads and tighter credit standards "would make some types of credit more expensive and discourage some spending, developments that would require offsetting policy actions, other things being equal."

Yesterday (RTT) - ...Philly President [Plosser] explained... “It is important to recognize that the Federal Reserve cannot resolve this price discovery problem,” he said. “The markets will have to figure this out. Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks. Indeed, in some circumstances, lowering interest rates may prolong the painful process of price discovery.”

Ever get the feeling the newly "transparent" Federal Reserve is floating trial balloons? What a difference a day makes! Go back over the last several months of Market Rewind month-end summaries. Irrespective of the occasional off-beat governor comment to the contrary and boxed policy statements, the Fed has consistently maintained throughout this disruption that they will "act as needed according to the data."

Here is a mid-day chart. The Dow has already hit its 200-day moving average. Cumulative Tick is strong, though trend strength is flattening out. Look for some prospective volatility around the Beige Book release.

2:50PM CST UPDATE: Nice. If you happened to have put on a long position when I mentioned the intra-day pullback was overdone yesterday mid-afternoon, you closed out today with a 4%+ gain on the SPY. I'd expect some follow-through by the end of the week on month-end buying, but personally used the opportunity to take some risk off the table. Hope it was a good day for you.


1 comment:

reillygroup said...

Insightful perspective!