Will a Fed rate cut be enough to stave off a stock market collapse?
*The Economist, January 22, 2008:
"THE Federal Reserve slashed its benchmark interest rate by
three-quarters of a percentage point to 3.5% on Tuesday January 22nd.
The decision came at an unscheduled policy meeting—the next planned one
was due on January 29th and 30th, when it was widely expected to reduce
rates by half a percentage point. With global stockmarkets in freefall,
the Fed instead decided that a bigger cut was needed—and sooner. A week
may be a long time in politics, but waiting eight days to cut rates
would, it seems, have been an intolerable stretch for financial markets.
The deepening gloom about the economy may well warrant such an
aggressive response. But the timing is puzzling. There is more than a
whiff of panic about slashing rates little more than week before a
scheduled meeting. The Fed statement issued with the decision
rationalises the cut as a response to “downside risks to growth”—the
phrase is repeated twice in six short paragraphs—and cites recent
gloomy data on housing and jobs. Yet the economic news has not grown
any worse in the past few days and, given the time needed before
monetary policy affects spending, the added urgency seems odd.
What has shifted for the worse is financial-market sentiment. It is
hard not to conclude that the Fed has acted to shore up markets, which
have switched to panic mode alarmingly quickly over the past week. The
Fed noted—it could hardly fail to do so—that 'financial market
conditions have continued to deteriorate.' But if concerns of
further stockmarket damage was its main motivation the cut did little
to prevent a big sell-off on Wall Street."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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