I have changed my mind.
Until recently, I thought the Fed could stand pat at their December 11th meeting. However, I have completely changed my mind in light of the continuing credit market turbulence.
Take a look at the commercial paper market (90-day asset-backed CP minus 90-day T-bill). Think mortgages, credit cards, auto loans, etc:
We’re back to almost 250 basis points. The spreads have widened so much that they’re close to where we were last August. The key here is that short-term money markets are not funding properly.
This deterioration is what Mr. Bernanke and Mr. Kohn are looking at. It is of grave concern. It means businesses cannot function properly. And that could mean job losses.
Let’s take a look at another chart:
What you’re looking at is sixteen straight weeks of decline in the asset-backed commercial paper market. Roughly $380 billion has evaporated. Vanished. That is a terrible sign.
Finally, let’s take a look at the London money market—the so-called Ted spread in the dollar-funded Libor market:
Just in the last month or so, it has gone from 94 basis points all the way back to 215. That’s basically where we were this past summer.
The general theme here is that the widening of the spreads shows serious credit deterioration. It shows confidence deterioration. It shows turbulence that could prevent the money markets from financing businesses and consumers.
That is why I have changed my view.
The Federal Reserve should slash the fed funds rate by 50 basis points—a new shock and awe, similar to my call last September. They should do it immediately. I don’t even think they need to wait until December.
The sooner they move, the better off we are all going to be.