Will the Fed sell out the Dollar to buy insurance against a deep recession?
*Financial Times, by Krishna Guha and James Politi, January 31, 2008
“The Federal Reserve on Wednesday cut interest rates by another 50 basis points and signalled that the door was open to further reductions in an aggressive move to combat the risk of a US recession.
The move to cut rates to 3 per cent initially triggered a broad rally in stocks – the S&P 500 jumped 1.7 per cent in the first 45 minutes after the announcement – only for the market to turn lower just before the closing bell.
The dollar meanwhile fell to a record low against the euro before closing slightly higher.
The 50 basis point reduction in the Federal Funds rate came hot on the heels of last week’s emergency 75 basis point cut. The combined 125 basis point reduction represents the most abrupt easing of monetary policy by the US central bank since the early 1980s.
The scale of the move reflects chairman Ben Bernanke’s determination to get ahead of the deterioration in the US economy following criticism that the Fed was “behind the curve” on monetary policy.
In addition to offsetting the decline in its base case forecast for the economy, the Fed wants to buy some insurance against the possibility that the worst-case outcome for growth – a deep and protracted recession – could materialise.”
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