Fed Day

The Federal Open Market Committee (FOMC) meets again today for the first time since the end of January. But just because the FOMC hasn't had a formal sit down in 6 weeks doesn't mean the Federal Reserve hasn't been busy. On March 7th the Fed increased the Term Auction Facility (TAF) to $100 billion. On March 11th they announced a new $200 billion Term Securities Lending Facility (TSLF) designed to allow financial institutions to borrow from the Fed using MBS as collateral. Finally on Sunday the Fed agree to provide a $30 billion non-recourse 4 week loan to assist JPM's bailout of Bear Stearns. At the same time the Fed cut the discount rate by 25 basis points to 3.25% and announced a new Prime Dealer Credit Facility (PDCF) to provide overnight funding to prime dealers. All of these "Facilities" serve as extra support for the Fed's main policy action of lowering short term interest rates. They haven't been shy there either, cutting the Fed Funds rate 225 bps since September, including a 75 bps cut on January 22nd that was the largest rate cut in over 2 decades.

In the meantime since August 17, 2007 the dollar has fallen over 13%, the CRB commodity index has risen 32%, the S&P 500 is down nearly 10%, real interest rates are at or near negative and many are starting to realize that a recession may be better than debasing the dollar and stoking inflation even more. Yet, the Fed stands ready to cut the Fed Funds rate another 50-100 bps today.

I for one am worried that the Fed has effectively "run out of ammunition." This is the problem that Bill Gross ruminated about in his last market commentary, which I blogged about back on January 30th:

Because demand in the form of consumption has been artificially and fictitiously stimulated in recent years by financial engineering run amuck, there is a legitimate question as to whether its black hole imploding destructiveness can be totally countered with another dose of lower yields and deficit spending packages.

The economy is acting a bit like a drunken sailor, and unfortunately the Fed thinks the cure is another round of liquidity shots to which the sailor will most likely not respond well.

So what will the Fed do? We will know in 30 minutes and it is all up to these 10 lucky Fed governors:

Hat Tip: WSJ, Ritholtz, Rutledge