Why Markets Fell Post Fed Cut

Equity markets fell sharply following the Fed's 0.25% cut to its federal funds target overnight rate. The S&P 500 index was off about 40 points, while Treasurys rallied.

Some economists saw the drop as an indication traders were looking for a 0.5% cut, despite the nay-saying of an overwhelming majority of economists. To wit, while a full 115 out of 124 economists surveyed by Bloomberg anticipated a 0.25% cut, CBOT futures indicated that a 0.25% cut was fully discounted, while the odds of a half-point reduction were 28% prior to the move.

"By cutting by only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as what market participants believe. In other words, the Fed sees recession risk as being less than 40 percent whereas the market sees recession risk as at least 40 percent," Moody's chief economist John Lonski said.

Others felt the selloff was due to a more hawkish than expected economic outlook.

"The rate decision and the Fed statement are more hawkish than market expectations and this should be bearish for equities and bearish for dollar/yen as well, but bullish for the dollar against the euro. This should accelerate the euro's downside against the dollar," JPMorgan Chase's Ken Landon said.

Sources: Reuters

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Comments

[Lisa:]

Not sure that Moody's is a particularly authoritative source to quote. Looked recently at its performance rating bonds?

2007 Dec 11 04:47 PM

[Tom B:]

I worry a lot about the housing crisis. It has barely affected my region, but will it? Will it be as big as the tech crash of 2000. Should I pull my assets out of Etrade. The uncertainty of it all is troubling. But, I think the Fed shouldn't be cutting rates AT ALL. It's killing the dollar.

2007 Dec 12 09:20 AM

[Al Capital:]

There is little doubt that whatever action the Fed took, the "market" was going to sell, simply because the action was driven by uncertainty and no one likes uncertainty. But the recession risks, at least those presented as probabilities as in Eli's post, are not accurate. The range of recession sentiment varies from about 5% (and I am in that camp) to 100%. Now although the Wall Street Journal presents that data to indicate the average = 36% chance of recession, the data actually indicate that there is no consensus, and that is all. In terms of monetary indicators the chance of recession is very low, and in terms of productivity, the chance of recession is very low.

mnrtrading.blogspot.co.../

2007 Dec 12 11:16 PM