A lazy rate cut crashes the market
Most traders
fully expected the Fed, always reluctant to cut rates, to make that 25 Fed Funds rate cut today, but the markets harbored expectations that
a 50 point cut would really signal the Fed's intention to fight recession. Well, even
though the 25 point Fed Funds cut was expected, the Fed was also faulted for dropping the Bank's discount rate (the rate banks can borrow from the central bank) only 25 points and not 50, so the markets crashed as traders
almost act to "punish" the Fed for its tepid action to ease the credit crisis.
Only four short months ago, hardliners were calling for keeping interest rates high to stave off a weak dollar and inflation. They were even implying that a recession would be good for America, like a cold shower. They cited "moral hazard"; bailing out the subprime victims who acted inappropriately - the lenders, the borrowers and the buyers of subprime laced CDOs - would create a precedent that would encourage new risky behavior.
In the end, the hardliners are increasingly being seen as shouldering responsibility for the continuing slide of the economy:
Only four short months ago, hardliners were calling for keeping interest rates high to stave off a weak dollar and inflation. They were even implying that a recession would be good for America, like a cold shower. They cited "moral hazard"; bailing out the subprime victims who acted inappropriately - the lenders, the borrowers and the buyers of subprime laced CDOs - would create a precedent that would encourage new risky behavior.
In the end, the hardliners are increasingly being seen as shouldering responsibility for the continuing slide of the economy:
"I think we have a divided Fed, which is the problem" Bill Gross, head of the world's biggest bond fund, Pimco, said on CNBC immediately after the decision. "We have half of the Fed that gets it ...The other half doesn't get it. That portion is more academic--less connected to the financial market."This is the economic crisis that won't go away. It started with the summer credit crunch and its severity is forcing the hand of the Fed. The Fed has indeed become Wall Street's bitch and in these scary economic times, the Fed has to comply or risk being the bitch that launches a recession. Expect a makeup call or two before the Fed's next January meeting.
Pat; I comepare the market to a 4yr old. If they dont get their way they throw a fit. What was up with today though? I wrote 2 posts between yesterday and today to give my perspective. Stop bye when you can. I think it gives an explanation that the majority can appreciate.
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Pat,
Kudos on addressing what's going on in the markets. I'll have a post soon about agents who are glossing over the serious implications you so aptly point out.
Nigel
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as you can see - it was just the beginning.
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