The Fed Needs Credit Confidence to Return. Today.

Today could be the single most important day in the history of this credit crunch. Up until now, every major Fed announcement has resulted in a market pop, at least for one day. If in the wake of $30 billion and a bunch of extra liquidity the credit markets still crunch further, there's a very good chance that the Fed is beginning to run out of firepower. And absent the Fed's ability to rescue us, the future looks bleak indeed.

Don't worry too much about stocks. The stock market can go down, can even go down quite a lot, with little in the way of extra systemic risk. The credit markets are where the real risk is, and the Fed is desperately hoping right now that its action over the weekend - to open its discount window to investment banks for the next six months - will help prevent a credit-market collapse.

So far, things aren't looking great. Libor has gapped out to 5.5875% from Friday's 5.31375% - those 25 basis points are important, and they're in the wrong direction. If there's a silver lining to this cloud, it's the fact that correlation is going down: people are more concerned about individual names <cough>Lehman</cough> than they are about a generalized collapse.

One thing that's clear is that it's going to take the US market being open for a little while before we get any real prices in the credit markets. European trade has been thin and nervous, and the rest of the world is clearly going to take its lead from what happens in New York over the course of the day. And no one will be following the markets more avidly than Ben Bernanke and Tim Geithner.