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Tuesday, March 18, 2008

Fed Cuts 75bp

As we expected the Fed cut the fed funds rate by 75bps, and made an equivalent move in the discount rate. What is interesting is that the Fed had two dissenters to the vote, Governor Plosser from Philly and Governor Fisher from Dallas, both wanted a smaller cut. Plosser is a well known hawk on the FOMC, so this was not surprising. However, this combined with a stronger inflation message, could imply the end of strong rates cuts. Keep in mind, the market responded very favorably to the move, despite at one point having priced in a 100% chance of a 100bp cut (the GS and LEH news did help). This also supports the possibility that we could be near the end end of the rate cuts or at least at a point where we see a significant reduction in its magnitude (ie 25bps). Of course the Fed's future reaction will be very reactionary to market news and data.

Investment Idea: We continue to believe home builders may soon become a good play and should be payed close attention to. We will be looking at the ETF 'ITB'

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