When the Federal Reserve cut its discount rate from 6.25% to 5.75% at an unscheduled meeting of the Federal Open Market Committee on August 17th, one ostensible but unspoken reason was credit market turbulence and worries over the health of many financial institutions.
At its next regular meeting on September 18th, Fed policymakers cut both the federal funds target rate and the discount rate by 50 basis points, to 4.75% and 5.25%, respectively, citing concerns over the economy. In the accompanying statement they wrote that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."
Then on October 31st, the central bank cut its fed funds target rate by 25 basis points to 4.50%. While they did say that "growth was solid in the third quarter, and strains in financial markets [had] eased somewhat," they noted that "the pace of economic expansion [would] likely slow in the near term, partly reflecting the intensification of the housing correction."
Given all of this, it seems clear that the Fed's goal in adopting an easier monetary stance was to help both the ailing financial sector and the U.S. consumer, whose distress has undermined housing and related industries and helped diminish the outlook for domestic spending and economic growth going forward.
Call it unintended consequences, but based on how various stock market sectors have performed following the initial easing move, it would seem that equity investors, at least, have come to an altogether different conclusion about the reasons for the Fed's recent change in course. Since August 16th, the groups that have fared worst have been financials and consumer discretionary, while those that have done best are materials and information technology.
Under the circumstances, one might wish to ask: Was it the Fed aiming to help out banks and consumers -- or speculators?
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
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Reader Comments (Page 1 of 1)
11-05-2007 @ 3:36PM
Athelstan said...
Both Bernanke and Greenspan have been trying to help hedge funds and banks by encouraging speculation in bank stocks. That could blow up in trader's faces. This is a dangerous tactic which could lead to a run on US banks.
The smart are beginning to realize that Wall Street institutions are built on foundations of BS and worthless investments. They and the Fed are trying to get the gullible public to buy. CNBC has an endless list of guests forever trying to sell these clunkers to us.
Right now, investors would be better off buying Chinese and Indian financials. The latter especially has few investments related to the subprime debacle. Gold and US Treasuries are still the safest bet for the time being.
11-05-2007 @ 7:55PM
william lindblad said...
The Fed move was self-serving and simply intended to instill some confidence. This is a complicated mess and they were buying time to plan the next move.
11-05-2007 @ 6:18PM
william lindblad said...
The Fed move was self-serving and simply intended to instill some confidence. This is a complicated mess and they were buying time to plan the next move.