Fed Throws a Hail Mary Pass...and Everybody Loses

Today, 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

[Bruce]

Mike,

I too think that Bernanke has taken leave of his senses. One also has to wonder if 'ole Greenspan and Bernanke didn't sleep in the same bed last night. The full consequences of his actions truly boggles the mind. While the cheering and clapping and clinking of champagne glasses might be heard on Wall Street for the next little while, the sound of weeping, wailing and gnashing of teeth isn't too far behind. This is nothing but smoksescreens and mirrors, merely a band-aid solution for a wound that had become too infected to heal. Get ready for the you-know-what to hit the fan...

[Mike Adams]

Our Banks are simply not being regulated! The entire banking system is an Enron waiting to happen; and when these facts find the light of day, it will be pure misery for all the hard-working/honest folks out there as the thugs in charge will still have their millions stashed away. What can we do? Demand our Congress investigate this mess and DO SOMETHING to save us from a total meltdown! Audit the reserves of our banking system today!! Demand we regulate NOW!

[Edgar]

Interesting comments. What's upsetting is the celebration of low interest rates which may be good for Wall Street and issuers of commercial paper but is not good for savers. In fact, low interest rates unmotivate people to save, IMO - and the USA already has a negative savings rate. Well, as George Bush said after 9/11 - go out and shop and take your kids to Disney World. Sad.

[Iggy]

It seems to me that the system as of right now depends on information not being made public, for example true valuations of assets that would inevitably lead to mark-to-market.

One other example of opacity would be the refusal of the Fed to make the M3 figures public since last year.

For the ball to keep rolling as it has until now, it is important for the holders-sellers of bubble assets to never reveal the true value of such holdings.

[eh]

[(...though stock traders are not exactly the sharpest kids on the block when it comes to economic matters),...]

That's not their job; their job is to be on the right side of a trade -- the profitable side. And supposing succumbing to 'doom and gloom' were to keep them, or maybe you, not to mention many times me, from making profitable trades, then to that extent it is not a good thing.

Right now, the market is headed up. That's it.

[Justin]

The Fed did the best thing and there won't be a recession, whilst housing starts will stabilize. The rates must fall lower, along with the dollar.

Heh, I just thought I'd type that to see how it looked. Yep. BARMY.