Tuesday, August 21, 2007

Fed May Cut Funds Rate

Looks like the Fed's are going to drop their Fed Funds rate target to provide more liquidity.

Most economists believe Fed will cut at or before its Sept. 18 meeting
WASHINGTON (MarketWatch) -- U.S. credit markets remained extremely fragile Monday, and observers said the Federal Reserve may have to lower its federal funds target rate to inject permanent liquidity into the market and provide investors with more assurances that the central bank will act to keep the economy growing.

Yields on short-term Treasurys plunged on Monday, evidence that fund mangers were parking their cash in the safest and most liquid assets rather than risk them in any asset backed by mortgages or even in the normally sedate commercial paper market.
Two things:

First, there is no such thing as "permanent liquidity," so be careful in believing any of that.

Second, when yields plunge on bonds, you get capital gains. Those of us who saw this coming were able to set themselves up to make a nice profit.

I'd look for more of the same in the near future.

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