Tuesday, January 22, 2008

Fed Slashes Interest Rate 75 Basis Points: And it doesn't really matter

Don't be fooled, this means nothing for today, this week, this month. Lowering the cost of money only matters to those who want to buy money. More important will be the open-market operations, directly injecting cash into the system. Right now the New York Fed is more important than Washington.
Three points to reiterate:
  1. This move is impotent, almost desperate.
  2. To date, the Fed is a one-trick-pony. Flood the system. We'll know how serious the Fed is when they exercise the other tools, including buying equities directly (which they can do).
  3. The Fed is a serial bubble-blower. The big blobs of money are going to go somewhere.

From the AP via Yahoo Finance:
The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession....MORE