The Fed Tries to Save the Economy.... And Everybody Loses

Yesterday, the Federal Open Market Committee, the policymaking arm of the Federal Reserve Board, threw a Hail Mary pass to try and save the economy. They cut the discount rate and the federal funds target rate by 50 basis points. Based on how various markets reacted, let's see if we can get some sense of what Chairman Ben Bernanke & Co. actually achieved:

S&P 500 index: closed at 1519.78, a gain of 35.28 points, or 2.38 percent from the price at 2:15 p.m (just before the Fed acted).

Spot gold: closed at $723.50, a gain of $7.75, or 1.08 percent from the price at 2:15 p.m.

U.S. dollar index: closed at 79.21, a loss of 0.43, or 0.54 percent from the price at 2:15 p.m.

10-year Treasury bond yields: 4.485, a rise of 2.5 basis points, or 0.56 percent from the price at 2:15 p.m.

So, while stocks went up (which most people would interpret as a good thing, though stock traders are not exactly the sharpest kids on the block when it comes to economic matters), gold and bond yields rose and the dollar fell (which many would not view so kindly).

Meanwhile, the Fed's actions are unlikely to have any impact whatsoever on a housing market that is saturated with record amounts of mispriced supply, a population that is up to its eyeballs in all kinds of debt (with interest rates that are, in many cases, headed higher despite the move), and excesses and imbalances that are, for the most part, virtually unprecedented (and which will likely worsen further as a result today's panicky, moral hazard-inducing overreaction).

I suppose the bulls will be spinning this as a "win" for many days to come.

Comments

[Tom B:]

Exactly right on all counts. I am seriously annoyed at the weakening dollar and also think that if builders over-built or consumers used home equity to buy trinkets, they deserve to lose their shirts. The impact of the subprime debacle is broader than that, extending to innocent parties, but you get my drift.

2007 Sep 20 08:35 AM

[David Roskoph:]

By pretending that we can sustain perpetual prosperity, the push the probability of a depression higher. Supporting artifical bubbles with inflation will have a price. Prudence is absent as Uncle Ben and Uncle Sam team up to convince consumers to keep on consuming, even if with government dollars.

2007 Sep 20 03:09 PM

[StreetSweeper:]

Agree, we are all to pay the piper after this dance is over. It is curious why Ben reversed his staunch position against a cut and being "bullied" by the market. The unanimous decision to cut so deeply in favor of a short term benefit that encourages a longer term inflationary trend and weakened dollar makes little sense unless the Fed was heavily pressured by someone. But by who? Big business or big politics?

2007 Sep 20 03:23 PM

[chagrinned1:]

Sorry..cannot agree. The raw emotion shown in the markets forced the Fed to do something dramatic. He did and the markets reaction applauded. Will there be another 1/2 point cut this year? Doubt it!!
Ben B successfully showed that he will be there to prevent panic and we were near the panic stage. He did what he perceived had to be done.

2007 Sep 20 09:22 PM

[armadillo:]

One word.... Amero

2007 Sep 20 10:54 PM

[mashny:]

Well said.

2007 Sep 21 03:06 AM