Federal Reserve -- Trick & Treat

I would not pretend to know what the Fed will choose to do
with the Fed Funds Rate come Halloween Wednesday. The heavy
betting is on a 25 bp cut then followed by another 25 at the
upcoming 12/11 meeting to stoke holiday shopping. The markets
have all but stampeded the Fed into a cut on Halloween. At
some point, the Fed is going to need to reclaim authority at
the short end of the yield spectrum. Blowing off the speculators
on Halloween would be terrific fun, but it could create a ruckus
not soon forgotten.

So, the bettors are counting on a FFR% cut treat this week. The
"trick" is that the Fed is continuing to run a very tight ship
in terms of monetary liquidity. Federal Reserve Bank Credit and
the adjusted monetary base, cornerstones of policy, are up a
pittance this year, despite the July crisis. However, the Fed
also sees that a third of the funding lost in the lock up of
the commercial paper market has shown up in the banking system's
jumbo deposit category (over $ 200 billion just since July). So,
credit driven liquidity, although barely growing short term, is
repairing nicely.

Things may change, but so far the Fed is holding off on the kind
of fast liqudity infusions we saw in Uncle Al's heyday. We'll see,
but right now, a modest US liquidity situation does not of itself
support all the excitement in the various markets we have seen
since last August.