In a previous blog entry I commented on how the Fed reacted to an event that might have been a non-event. I commented in that blog entry on how the recent market drop was probably due to the unwinding of a rogue trader at a French bank. It seems that the 7.9 billion of futures was sold by the bank at the beginning of this week causing a massive market upheaval.

People are now wondering if the Fed misfired? People are wondering if Trichet with his firm stance is actually the smarter one. It indeed looks like Bernanke and crew (except Poole) lost it.

I am sure that the Fed did not know about the market sell off, and neither did Trichet.

The bank said it decided to unwind the positions as quickly as possible before informing investors because other banks could have taken trading positions that would have made the losses worse.

Through Trichet stood firm and issued guidance that they will not budge. Yet analysts and many in the market said, “oh no Trichet is wrong, behind the curve and has it wrong.” Now it appears the Fed got it wrong, and how does the Fed respond?

The Fed source said the central bankers remain “every bit as comfortable” with the decision to cut rates in an inter-meeting move.
The decision to rate cut was based on a set of factors, not just volatile stock markets, the source said. There was volatility prior to Monday’s trading, when SocGen was unwinding its positions.

I call BS! And here’s why:

  1. The last time such a cut outside of the market was used was after 9/11. Is this market crisis of such level? I don’t think so.
  2. Today’s employment numbers are unexpectedly good. Are you telling me the Fed did not know about these numbers ahead of time? If they did not know the numbers then they are dumb, and if they did know the numbers then they are dumb.
  3. There was only one more week to wait to cut 75 basis points. We had been waiting for over a month.
  4. They did it before the market opened.

If the market was not a major part of their decision then they would have done the cut next week. But they did it this week, and now more cuts are expected. Sorry, but if it walks like a duck, talks like a duck its a duck! The only Fed board member who voted against this was Poole. So Bernanke admit the open secret, you are being led by the market, and by people like Jim Cramer.

If the Fed was spooked into making an emergency rate cut this week on the back of what was just technical selling, it could further undermine market confidence in Bernanke.

No, I think many already have no confidence in Bernanke. Trichet stood firm as the German market lost 7% in one day! That’s not a man I want to play poker against. My hats off to you Mr Trichet and Mr King.