Right after the JPMorgan / Bear Stearns deal, the Fed has cut the discount rate, the rate it lends to banks normally overnight, from 3.5% to 3.25%, now bringing it within 25 basis points of the funds rate, currently at 3%. Remember that the FOMC meets this Tuesday as well with the markets potentially pricing in a cut from 50 basis points to up to 75 basis points. If you’ve forgotten how to calculate the odds of a rate cut, check out this quick tutorial I wrote up a few weeks ago.
JPM purchases BSC for $2 / share and the Fed cuts the discount rate a quarter point? Perhaps the Fed now knows that banks may actually fail and are doing something about it? And now what happens tomorrow? Do we rally on the news that the Fed is willing to cut even on a weekend or do we pull back due to the, what I think is, uncertainty in the other financials? And will the Fed still cut 75 basis points off the funds rate Tuesday? Too many questions right now I think before the markets can attempt a solid rally.
I’ll keep you updated if anything else happens this evening.