Link to the Show / Show NotesAlthough the latest economic reports continue to fuel recession worries, additional signs that the sub-prime mortgage debacle is far from over drove stock prices down and recession worries up. The Federal Reserve's announcement on Tuesday that it would lend Treasuries in exchange for debt that includes mortgage-backed securities drove the biggest rally the stock market has seen in five years. The next day, however, investors' worries that the Fed plan would not work pushed stock prices back down and sent the dollar to record lows. Stock prices fell further on Friday's announcement that the New York Federal Reserve Bank and JPMorgan Chase & Company provided Bear Stearns with emergency funding because their cash position had "significantly deteriorated" in the past 24 hours. (Bear Stearns was the second biggest underwriter of U.S. mortgage bonds.) Early in the week, most analysts expected the Federal Open Market Committee (FOMC) to reduce the federal funds rate target by an additional 50 to 75 bps when they meet on March 18. The probability of a 100 basis point cut was virtually zero. After the Bear Stearns news, the probability of a 100 bp cut increased to 56%. Although the economic reports released last week provided the bad news that retail sales fell more-than-expected in February, there was also some good news. Initial unemployment claims were unchanged for the week ending with March 8, the international trade deficit shrunk with new record exports, and the year-over-year pace of inflation as measured by the core consumer price index was 2.3%--within the Fed's 'comfort zone.'
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