I feel that I’ve got a little bit more clarity in my understanding of the Fed thinking. My previous post on the Fed policy is here.
I’ve heard a lot of opinions today that the cut of the discount rate today is mostly symbolic and not much helpful. After all, the average daily borrowing at the discount rate was only $190 million this year.
But I think this action demonstrated once more that Feds are very concerned about the dollar franchise in the world as well as the suffocating liquidity problem in the markets. The discount rate cut was not very bearish for the dollar. Yes, the yen carry trade unwound, the oil increased a little bit, but besides that the dollar survived.
But was it really helpful? Yes, I think it was.
First, I think the Fed announcement before the market open at the last day before the options expiration inflicted the big damage on the bears (not me, I was a well-prepared bear). It should be a first indication of the existence of the Bernanke put.
Second, it should help the real problem, i.e. the credit squeeze at Countrywide Financial. Countrywide is the biggest mortgage dealer in US (in the world?). As such, they keep a huge portfolio of the meaningful prime mortgages, to people with solid income, 20%+ down payment and full income verification. Those people are coming to Countrywide for mortgages at around 6.5% rate. Before today this kind of mortgages could not be financed by the discount rate, which was at 6.25%. Today, the rate is 5.75% and suddenly it became possible to finance those deals through the discount window. Countrywide may use those mortgages as collateral, raise many billions of short-term financing and still be cash-flow positive on that deal. I don’t think that the bankruptcy of Countrywide is a possibility anymore.
In conclusion, I see the Feds at work and I think they did the work well