Taking Stock of Bonds

January 23, 2008

Mean Business

The Fed's rate cut on Tuesday was significant for a variety of reasons. First off, it was the first inter-meeting cut since the terrorists attacked the US on 9/11. When it comes to magnitude, it was the largest rate change since 1994 when the Fed hiked rates by 75 basis points. And when it comes to rate cuts, it was the largest since 1982.

Is the Fed being cautious or is there a more deep-rooted issue that they have spotted? Do they believe that recession - once a vague possibility - is now very likely? Are we in the midst of a recession? It'll be some time before we can comfortably and accurately measure fourth quarter 2007 and first quarter 2008 growth, but given the magnitude of the monetary policy change one would believe that the US economy is mired in a recession.

Investors also may want to consider the strong language the FOMC used in announcing the rate cut: "The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets ... Appreciable downside risks to growth remain."

This from a group that usually tries not to be alarmist.