What does Fed Chairman, Mr. Bernanke, know that we don’t?
By Lawrence
US Federal Reserve Open Market Committee (FOMC) made the announcement last Thursday that it is going to buy $40 billion MBS (mortgage backed securities) every month with no expiration date and that the low interest rate will be kept until at least 2015. As a market participant (i.e. trader) I do not really give a damn what that means on that day. I did not even read the exact statement until an hour after it was released. The market reaction to the announcement was wild and there was absolutely no time for in-depth analysis of the statement.
Over the weekend, I started to think about the implication of this FOMC decision. My conclusion of the reasons behind this decision is giving me very uncomfortable feelings and a sense of danger in the financial markets before US election in November.
Fed never made any bold changes to its policies right before election. This is the very first time that we get a shock like this. Many professional traders are surprised by this move from the Fed simply because of this. The truth is that I was one of those surprised. Luckily I have a plan B in place and that saved my day.
Giving Mr. Bernanke the benefit of doubt that he is not trying to boost Mr. Obama’s re-election chance, where does this Fed action led us to?
There is only one reasonable answer – very bad financial problem must be looming that waiting 2 more months will be disastrous.
Notice the action prescribed is specifically targeting the MBS, it is obviously a move to help the financial institutions to reduce the pressure on their books. I am not talking about just US financial institutions. I am talking about major European financial institutions as well. One or more of these firms must be in such bad shape that Fed has to act now.
Last time when Fed suddenly created the unlimited borrowing facility for the major banks, we had no idea why it was done. Until many months later that we learned many banks could not borrow money to support their daily cash flow. These banks could have gone under if not for the facility put in place right on time.
The question now is whether the crisis will be exposed or not. If it is not exposed like last time, all we are going to get will be a calm range bounded world markets until after the US election is over. If it is exposed, however, don’t be surprised that these coming 2 months turning into one hell of a roller coaster ride.
