This market is just waiting for Bernanke and friends to make of their minds on what to do about the Fed Funds rate. First, the discount rate was cut to 5.75%, which did calm the markets somewhat. However, you can not tell that by the past Tuesday and Wednesday. Second, the market is now anticipating that the Fed is going to cut the Fed Funds rate before its next scheduled meeting, which will be held on September 18. The cut in the discount rate was nothing but symbolic. The discount rate, a lagging rate, follows money market rates. So, if anything, it was probably a shrewed move by the Fed. I guess market participants should go back an revisit their Money and Banking course to get a quick refresher on Monetary Tools. If the Fed really wants to be serious about providing liquidity to the banking system, the recommended policy would be to reduce the reserve requirement ratio that depository institutions (banks) must hold on their deposits (liabilities). This action would immediately provide instant liquidity by way of excess reserves. These are the reserves that banks can loan out. May be the Fed could surprise us a cut these requirements, which would immediately tell me that the subprime and condo problem is a whole lot worse than most investors think it is.
If we get the cut in the Fed Funds rate or reserve requirement ratio, investors must watch the performance of the financial sector, consumer sector, and utility sector for clues of the overall strength to the economy. However, these three sectors need to start out performing the S&P 500 and penetrate their well defined resistance lines. So far, they have not outperformed the market. The following charts depict the performance of the three sectors relative to the S&P 500:
Stay tone. Things are going to get really interesting, very shortly.
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