Prague Twin

Tuesday, December 11, 2007

Just a Quarter?!

The Dow dropped nearly 300 points today on the news that the Fed lowered it's target rate and discount lending rate by 25 basis points each. Now, doesn't the market usually rally on a rate cut? Sure, unless they were expecting more. Clearly, traders wanted a full half a point cut to 4.0%.

Here is what I don't get. If market valuations are at near record highs (fact) and the credit crisis is just a media invention (what my detractors say) and the housing market isn't really that bad (same as the credit crisis) why is it necessary for the Fed to aggressively cut rates?

If the "experts" don't believe that a recession is around the corner, why should the Fed even have to cut rates at all?

Today's market reaction to the Fed cutting rates by .25% reminds me of a little brat screaming that they didn't get what they wanted for Christmas.

But I suppose that Fed just isn't in that much of a hurry to debase the dollar. Net Foreign Purchases coming soon!

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7 Comments:

  • Funny when you think about market economics and non intervention. I thought the Fed were brave going 25v points. anymore would border on intervention, just as the mortgage bailout represents real intervention.
    It would be great if the set rules were adhered to, and the Fed move was at least reasonably responsible.

    By Blogger Cartledge, at 1:49 AM  

  • praguetwin, you wrote:

    "Now, doesn't the market usually rally on a rate cut?"

    The market is a leading indicator. It reflects beliefs about the future impact of today's actions.

    Hence, Tuesday's rate cut was insufficient in the minds of the millions and millions of market constituents. Meanwhile, in the past the market has dropped when investors were disappointed with the magnitude of Fed rate cuts.

    Moreover, if the rate cut had matched the 50-basis point expectation of the market, the market averages likely would have remained nearly unchanged.

    One CEO of a major bank (can't recall his name at the moment) predicted a 75-basis-point cut. A cut that large should have sent the market averages higher. But at the same time, a cut that large suggests the economy is in serious trouble. If the Fed were to send the message that things are worse than expected, the market averages might fall.

    Presumably stocks will rebound today. But if the rebound fizzles, the Fed may have to consider another 25-basis point cut, like it did a year ago (?) when there was a similar disappointing response to a previous Fed rate cut.

    By Anonymous no_slappz, at 3:06 PM  

  • cartledge, you wrote:

    "...just as the mortgage bailout represents real intervention."

    Look again. The US government is committing NO funds to the mortgage issue in the American economy.

    Washington has merely supported the idea of pushing lenders to extend low introductory mortgage rates for a few more years. IN other words, Washington is asking the lenders to take the hit.

    If lenders accept the idea and give an interest-rate break to borrowers, the impact will appear on the earnings statements of lenders. Extending the rates will lower earnings. Thus, lenders will have lower tax bills as a result of this plan. But that's the extent of the largesse from Washington.

    By Anonymous no_slappz, at 3:12 PM  

  • no_slappz Dear dear, it never occurred to me that being just a little bit pregnant was a valid condition.
    So just because it is only a small bit of intervention it doesn't really count.
    You haven't convinced me yet, market economics is a 'set and forget' deal for governments, with tweaking left to central banks. The big lie, of course, is that governments can't resist involving themselves.
    Aside from the denial the only thing I object to is the intervention rarely reflects any real social equity.

    By Blogger Cartledge, at 8:10 PM  

  • Carledge,

    I think the mortgage bailout will surface eventually, but for now it is all just talk. Probably an opening salvo in a round of "you scratch my back, I'll scratch yours."

    The government is sending signals it is ready to help, but it wants the banks to take the first hit. If they do, the government will likely come to the rescue if they get in real trouble. Just my opinion.

    NS,

    Did you not read the next two sentences?
    Now, doesn't the market usually rally on a rate cut? Sure, unless they were expecting more. Clearly, traders wanted a full half a point cut to 4.0%.


    What part of that made you think I need an explanation from you? Do you understand what a rhetorical question is? Don't answer that it is a rhetorical question!

    By Blogger Praguetwin, at 10:34 PM  

  • Agree wholeheartedly about the brat comment. You can understand the investor wonks or you can respect them, but you can't do both. Merry Christmas, Mike.

    By Blogger Roger Fraley, at 10:20 PM  

  • I'm about to do a mental shut down, so I thought I'd better say happy Christmas. take care and cheers

    By Blogger Cartledge, at 2:30 AM  

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