After establishing the economic rational for cutting rates just three weeks ago Ben Bernanke, the Federal Reserve Chairman acted on it today. Judging by the reaction of the markets he surprised almost everyone.

Three scenarios now present themselves:
1) the economy is, or soon will be in dire straits, with housing foreclosures and job losses up and the perception and reality of distress forcing down consumer spending and GDP;
2) the economy is not yet in serious trouble but the potential is brewing and better and far more effective to "forestall' than to react;
3) the economy is not at great risk but the credit and stock market expectations for a cut had built up to such a degree that a violent negative reaction could generate real economic damage.

Statistics so far support the second scenario. But as happened late last year when the housing crisis first surfaced we are now in for six weeks of intense statistical interest.

Even with retained mention that "some inflation risks remain", there is little in the Fed statement that is positive for the USD. Overlooked in the Fed anticipation was the very weak Treasury International Capital System report earlier this morning. The US runs the largest capital account deficit in the G10 and though this statistic is volatile, funding the Federal deficit will not get any easier.



Regards,

Joseph Trevisani
FX Solutions
Chief Market Analyst