Measure Twice-Cut Once. What happened?

MEASURE TWICE...CUT ONCE. And like this old saying advises, Fed Chairman Ben Bernanke and his Federal Open Market Committee probably measured their decision quite a few times before making their recent ..50% cut to the Fed Funds Rate. But if the Fed's history of making cuts and hikes in cycles continues - this cut is probably not a "one and done".

Here's what the Fed had to say as they announced the cut: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time." This means that the Fed will take whatever steps are necessary in terms of rate cuts to try and prevent a possible recession, so long as inflation remains in check.

Initially, both Stocks and Bonds rallied on the comforting words from the Fed - but as Bond Traders analyzed the potential future impact of the Fed cut over the following days, they started selling off Bonds with both hands, causing fixed home loan rates to rise by ..125 to ..25%, actually higher than where they stood before the Fed Rate Cut. What happened?

Traders realized that a Fed Funds Rate cut could encourage increased spending by consumers and businesses, as borrowing costs will now be cheaper for Home Equity Lines of Credit, consumer loans like car loans and credit cards, and business loans as well. In turn, increased spending can translate into increased inflation in the long run - and inflation is bad news for Bonds. Bonds deliver a fixed rate of return, and the value of that return is eroded by inflation. So Bond Traders sold, the price of Bonds moved lower, and home loan rates moved higher as a result. Counterintuitive to many...but its reality, and now you understand what many do not - including much of the mainstream media

It was a Fed day afternoon yersterday- now when you know what happened, see the thoughts before it happened..

It's a Fed day afternoon. And both the stock and bond markets will be reacting to the words and actions of the Fed at 2:15pm ET. Let's break down the important questions - Will it be a half or quarter point cut? And what will the Fed say about inflation?
Everyone seems to have an opinion. Some are saying the Fed should not hike because of inflationary fears and Dollar weakness. The weakness in the Dollar is assumed to be inflationary because it will cost more to buy imports.
Some say the the Fed is already late and needs to cut by 50bp to avoid a recession. Jobs are weak, inflation is tame, housing and mortgages are performing poorly.
Others, like us, think that we will get a 25bp cut - the first cut in four years. Additionally, the Fed will cite inflation as a concern but should acknowledge that it is presently contained. We see this as the best balance to slowly help the economy without being an inflation threat. The Fed should have a green light to cut because their favored inflation measure, The Personal Consumption Expenditure Index (PCE) is under 2%. The result should be that stock traders will be disappointed, as they want a 50bp cut. Bond traders would rather see no cut to protect inflation, but will live with the 25bp.
Then there is good old Alan Greenspan. Appearing to have camera withdrawal, Mr. G is soaking up any media opportunity to pump his new book. His comments undermine the excellent job that Ben Bernanke has done. In contrast to Greenspan, Bernanke has been correctly patient and waited for the previous hikes to bring inflation down to the Fed's target zone. It would have been likely that Greenspan would have hiked much more aggressively, sending the country into a nasty recession, with Greenspan's only answer being another series of panic cuts, which would cause another bubble.
In the last bit of inflation news before the Fed meets to decide monetary policy, the Producer Price Index (PPI) “fell off a cliff” with a reading of -1.4% in August. Lower food (-0.2%) and energy (-6.6%) prices during the month led the unexpected decline in the Index. After excluding volatile food and energy prices, however, the Core Producer Price Index rose to a greater than expected 0.2% on higher drug and auto prices. Economists were predicting the PPI to fall to -0.3% and the Core PPI to rise by 0.1%. Overall, the PPI data is favorable.
Technically, bonds remain in a holding pattern trending above key support provided by the 200-day MA at $100.12