Wednesday, December 12, 2007

"All Options Are On The Table"

A short post on Tuesday's Fed rate cut. The stock market fell almost 300 points after the Fed disappointed with only a quarter-point. The statement (my bolds):
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Note the references to "financial markets." Those who know the history of the Federal Reserve know how extraordinary this is compared to the "old days" (before latter-Greenspan, and certainly before Bernanke) when the Fed was loathe to admit it even knew financial markets existed. I've long posted here that the stock market has become the tail that wags the Fed, an end in itself instead of a passive reflection of underlying business conditions. That's clearer than ever now.

The Fed would have loved to satisfy the market with a larger rate cut (and in past economic cycles, would have done so) but couldn't because foreigners will not underwrite it. That's evident in oil, gold, and the dollar. Regarding the dollar, here's one reason why the Fed, and thus the economy, is in a box. Keep that story (and other big no-no's such as this) in mind as you continue to read seemingly puzzling reports like this. You didn't think it was just about a long-dormant nuclear weapons program, did you?


Blogger mrmetrowest said...


Speculation rose that the US central bank was preparing to unveil a new facility that would auction loans to banks, providing liquidity directly to a large number of financial institutions against a wide range of collateral.

Would 'wide range of collateral' include worthless securities, by any chance?

12/12/2007 6:43 AM  
Blogger frank said...


12/12/2007 7:53 PM  
Blogger frank said...

Don't worry. Once a Democrat gets into the White House the fed won't care how Wall St reacts to rate changes.

12/12/2007 7:54 PM  
Anonymous Anonymous said...

What is that supposed to mean Frank?

12/13/2007 1:31 PM  
Blogger Ahistoricality said...

I can't speak for Frank, but I suspect it means exactly what it sounds like: the Federal Reserve has been run by -- and for -- Republicans since the Greenspan era began. During the Clinton years, the Fed was fairly unresponsive to Administration pressure, but in the hands of Bushes it is agile and supportive.

12/13/2007 9:02 PM  
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