Wednesday, January 2, 2008

A look back at the Fed

A year ago, the two year note was trading at 4.80%. Now it's 3.05%, a difference of 175 basis points. Meanwhile the Fed, has cut rates 100 basis points to 4.25%.

So the market is telling the Fed that they should be at 3.5% on the current funds rate. The Fed, believes that by lowering rates slowly and allowing the economy to take some pain now, that it will be better off in the long run.

It will.

But only because the Fed is behind the curve. By deliberately being plodding in their rate cuts, the Fed will have to cut rates longer and deeper than they currently expect. And eventually those lower and deeper rate cutes will help the economy.

So we get Bernanke's "rough patch" instead of Greenspan's "soft patch."

But we will get the lower rates. It just takes longer with Ben.

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