My understanding is that the primary reason the Fed stepped in late last week was because, given the amount of bad paper out there, the banks no longer trust each other and are pricing in a risk of bankruptcy when they loan each other money, so the overnight funds rate shot up to 6% where the Fed has it targeted to 5.25%. After the FED injected liquidity the overnight rate came back down to in between 5 and 5.25. They targeted MBS because that is the source of the problem. As we go into Monday if the Asian markets act unsettled and that spreads to Europe and the overnight rates jumps back above 5.25% many people speculate the FED will forgo any additional liquidity injections and call an emergency meeting. The consensus is that if the FED lowers it will more than likely be 50 basis points with another 25 to 50 basis points in Sept. IMO if you see that happen in the face of a structurally weak dollar that means the situation is very grave. Here is a quote from Doug Noland concerning the severe state of the credit markets on a post I made last week
“I apologize for appearing overly dramatic. But this evening I have nagging feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I don’t know how and to what extent”
Interesting that Europe, Japan, and the US all injected liquidity at the same time this week, the last time that happened was after 9/11. IMO everybody should be paying very very close attention to this.
