Tough Love
Sep 17, 2008

Between dodging the latest "who will save" AIG rumor, the Fed doesn't give in to the market's demands and holds interest rates steady.

First, it seems that the majority thinks that AIG is too big to fail and is trying to get ahead of another bailout announcement (much like they did with Fannie & Freddie). A nice little relief rally is underway following some very oversold conditions earlier this morning.

Second, the Fed's new tough love stance is interesting and marks an important change for the market and the Fed's role in it. While the Fed is still throwing cash to inject boatloads of liquidity, this is really the first time they stood up to the market's demands and said no. Frankly, this is probably a long-term positive as we have to sooner or later break the market's addiction to a friendly Fed, but you have to wonder why they decided to adopt a tough love stance now and whether they had any choice given what we may see in the coming weeks (i.e. perhaps the Fed is reserving their final few bullets for when it is truly needed and they don't think now is the right time). I don't know, but these are good questions to keep in mind as we see some green on our screens.