FOMC Chair Ben Bernanke surprised me (and apparently, quite a few others) by slashing both the Fed Funds Rate and the Discount Rate 50 bps each. Markets loved Larry Kudlow's "shock & awe," with the Dow rallying over 300 points on the session. Yield on the 10 year is now well below 4.50%.
Why did Bernanke blink? "The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally." The hope is Tuesday’s action will "help forestall some of the adverse effects on the broader economy" that could arise from financial market disruptions.
The flip side is concerns about inflation. The FOMC statement read "Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."
As to the Dollar, Oil, Gold, soft commodities: We're long them all (excepting the greenback) through one asset class or another.
The Fed now has a third problem to deal with: They have become Wall Street's bitch. They may find that's a difficult condition to wriggle out from . . .
For more details, see:
• Christmas in September
• Jim Rogers, Faber Say Fed Rate Cuts Will Spur a Recession http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&
• Economists React: ‘One and Done’? http://blogs.wsj.com/economics/2007/09/18/economists-react-one-and-done/
• Half-Point Surprise
• Who Messed Up the Markets: Hedge Funds, Greenspan? http://blogs.wsj.com/deals/2007/09/18/who-messed-up-the-markets-hedge-funds-greenspan/?mod=homeblogmod_dealjournal
• Former Fed Chair Alan Greenspan: the era of low inflation is over http://bigpicture.typepad.com/comments/2007/09/ironic-quote-of.html
• The Fed is Spooked
• Fed Funds Rate Cut: Watch Long Rates
• FOMC Statement