What the Fed Wants to Do

I find myself in the unfamiliar position of defending the Federal Reserve. Please bear with me because this is strange for me but what they did today was exactly what they should have done. In fact, they should have done this a few weeks ago after the December jobs report.
I hear a lot of talk today about how the Fed is bailing out investors. Please. That misses the point. The Fed is not all powerful. Hard to believe but it’s true. In reality, they’re another player in the game. They’re just the most powerful.
The Fed isn’t panicking, nor is it trying to bail out investors—it’s in a fight with a bond market that’s refusing to cooperate. That’s where the panic is. Try to think of it from the Fed’s point of view. The central bank is ultimately here to protect the banking industry. The irony is that the Fed isn’t trying to bail out stock investors, it’s really catching up with a bond bubble, where people have made too much money.
Before today’s cut, the five-year T-note was 160 points below where the Fed Funds is. If you were a bank, you have zero reason to generate new loans. Just plop all your money in a long-term bond fund and you’re fine. The Fed can’t let that happen.
The five-year note is now well below the CPI. I know I’m beginning to sound like a broken record, but this problem is getting worse. Keep your eye on the Rydex Inverse Government Long Bond Strategy (RYJUX). It’s designed to double the moves of the T-bond market in the opposite direction.

Posted by on January 22nd, 2008 at 1:23 pm


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