Latest Fed Auction: Have Rates Bottomed?

Posted by ToddSullivan
on April 8th, 2008

The latest Fed auction was the first since they began in which the interest rate did not decline from the last auction. In fact, this time it rose.

Here are the results from March’s auction:

On April 7, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.820 percent

Total propositions submitted: $91.569 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.83

Number of bidders: 79

Now, those betting on more rate cuts by the Fed may be in for a bit of a disappointment. These auctions have been a great predictor of future Fed decisions. One may guess that Bernanke may feel he can help the economy more at this point by holding rates steady. This would cause the dollar to rally and by default, would put pressure on rising commodity prices (food and oil).

By taking this action he may reduce consumer prices, causing spending to pick up. That would push more growth into the system while at the same time leaving him some wiggle room should things slow in the future.

Remember, the vote last time was 8-2. Eventually, the “smaller or no rate cut” faction of the Fed will win and Bernanke will put the brakes on. My bet is that is sooner rather than later.

Look for only a 25 point cut and the statement change to more neutral at the April meeting.