You know what they say, don’t fight the Fed
December 17, 2008

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


Bernanke did what he said as far back as a speech in 2002. He went all in and cut the Fed Funds rate essentially to zero, and promised he would be in the long end of the market buying bonds. All of which should pull interest rates down across the board. This morning’s Libor setting (London Interbank Offer Rate) was lower by 27 basis points to 1.58%. I would guess it’s heading lower and would look to 1% before too long. The ten-year Treasury is trading at 2.10% by far the lowest it’s ever been.

I think bond buyers will go out the risk spectrum seeking some yield, and rates on corporate bonds should come down. Rates on 30-year fixed rate mortgages are heading below 5%. With rates so low money market funds will have trouble covering expenses and I think cash will flow to bank deposit accounts. A growing deposit base will give banks some breathing room and a chance to return to profitability. That might help the “jumbo mortgage” rate to fall below the low 7% area it’s trading at now. This is a key rate to me. A jumbo mortgage can’t be sold to Fannie or Freddie. It can’t be lumped into a securitized collateral bond as here is no market for such things right now. It would be a loan a bank would willingly make knowing it would stay on its books. If I were to look at just one rate for signs of a credit thaw, it would be the jumbo.

The good news the past few weeks has been the market rallying in the face of unrelenting bad news. Since its late November low to yesterday’s close the S&P 500 index is up 24%. A new bull market !!?? The Fed’s moves yesterday are widely interpreted as good news, so don’t be surprised by a sell off. Rallying on bad news and selling off on good news makes a certain amount of sense.

Lehman failed September 15, just about 100 days ago. Since then the stock market has lost about $3 trillion in value. We have had 26 days of a 4% move (up and down) and the government reported that consumers net worth has fallen by $7 trillion in the past year to $56.5 trillion from $63.6 trillion a year ago. The system has been shocked to an extreme and it will take a while to settle out. The typical bottoming process takes some number of months, even up to a year. We are two months into the current attempt. We have had a very nice rally in a bear market, maybe more encouraging than some in that it was into the teeth of worsening news. But I believe it was a bear market rally and while I hope/think the recent lows will prove to be a bottom, I do expect additional tests of those lows in the months ahead.

But I further believe that the Fed’s actions will work. We financed World War II in much the same fashion as the program being implemented now. Bernanke asked for permission for the Fed to issue its own bonds, usually a Treasury Department function. As I wrote the other day, I believe Ben sees the need to drain liquidity from the system (which selling bonds would do) and wants to act at his discretion to stifle any threat of inflation. I do like his longer term view.

Category: BP Cafe, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “You know what they say, don’t fight the Fed”

  1. Bruce N Tennessee says:


    This man, due to his continued bullishness all during the decline, doesn’t deserve a guest spot on your blog. He is of the Abby Joesph Cohen one note canary school…it is not that he’s stupid…but in times like these if you are going to publish cheerleaders, at least make them blonde…

    (Of course, he could be right, but that is not why he’s objectionable..)

  2. Pat G. says:

    Don’t fight the FED? Well of course not. Buy, buy, buy. That is until that dollar you’re holding becomes F**king worthless. Anybody who is a “regular contributor” on CNBC should be barred from this site.

  3. Moss says:

    When the f*#k is Kudlow going to retire. I am so sick of his pathetic chats about letting the market mechanisms sort things out. Does he not yet understand that the markets are not working? What does he not get? Denial is a very sad thing to witness.

  4. Texican says:

    To parphrase, I think what he’s trying to say is:

    “Blah, blah, blah, bottom, blah, bottom, blah, bottom, buy, blah, buy, bottom, bottom, buy, buy, bottom, buy BUY BUY BUY!”

  5. Pat G. says:

    I think the reader’s opinion herein, albeit 4, are fairly unanimous. That’s got to be a rarity on this site…

  6. Myr says:

    Woah. Don’t fight the Fed? The Fed has gotten it’s butt kicked over the past 1 1/2 years(since they started cutting rates). I think you’re being a tad naive in writing an article like this the day after they announce a series of extraordinary moves…give it a little time. This last move by the Fed(buying mortgages and threatening to buy treasuries) will turn out to be a big mistake. The Fed thinks they can scare people out of treasuries and into higher yielding(on a temporary basis) assets. All they’ll end up doing is scaring me out of the dollar and other US assets. The Fed is panicking and everyone knows it except you and the folks at CNBC.

  7. Steve Barry says:


    Your current world view worked for the last 25 years, the salad years of your career. That time is over. Change or become a dinosaur. Do some real homework about Total credit and GDP…stop trying to hope your way out of this mess. You will be toast otherwise.

  8. debreuil says:

    “but in times like these if you are going to publish cheerleaders, at least make them blonde…”

    love it : )