The Fed Can’t Win

It seems to be a symptom of how stressed the markets are that no matter what the Fed does, it doesn’t seem to work.

Jim Cramer and others have been clamoring for the Fed to cut rates to give a sop to the credit markets. Bloomberg tells us (and Felix Salmon was on to this yesterday) that de facto, the Fed has already cut rates via a temporary easing.

Instead of cheering, the markets saw this as a vote of no confidence and tanked.

From Bloomberg:

The U.S. Federal Reserve has already introduced a “temporary” reduction in interest rates by driving the four-week Treasury bill below the Fed funds target, says Charles Diebel, a strategist at Nomura International in London.

“It is clear that a `temporary’ easing has been put in place by the Fed,” Diebel wrote in a research note today. “This is what has really spooked markets overnight.”

The chart of the day shows the four-week bill rate has declined to 4 percent, below the Fed target of 5.25 percent and the actual rate, which dropped to as low as 1 percent last week and rebounded to 5.25 percent yesterday from 5 percent the day before.

“If this artificial suppression of short-term rates has to be maintained, which we suspect it will, then the Fed will eventually formalize the de facto ease with a move lower in the official target,” Diebel wrote. “It is likely to be at least a 50 basis-point move if and when it comes.”

William Poole, president of the St. Louis Federal Reserve Bank, said yesterday that the subprime mortgage rout doesn’t threaten U.S. economic growth, and only a “calamity” would justify an interest-rate cut now. The Fed’s next scheduled meeting is on Sept. 18.

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