Fed Panics Cuts 75bp, A Good Start, But Not Enough!

January 22, 2008

The Federal Reserves refuses to sit back and watch the Dow plunge another 300 to 500 points. Before the equity market open, the US central bank slashed interest rates by 75bp to 3.50 percent, helping Dow futures rebound from being down 500 points before the announcement to down 300 points at 8:35am ET.

US Treasury Secretary Paulson also pledged to push forward a stimulus plan that would offer a swift, robust and temporary fix for an immediate impact on the economy. This one two punch is certainly a step in the right direction and puts the Fed from behind the curve to ahead of it.

With commodity prices falling, the time was right for the Fed to put a down payment on future monetary policy and let the markets know that they are serious about preventing further losses in the financial markets. This is the least they could have done to avert a recession and we still expect another 25 to 50bp on January 30th because 75bp is just not enough. It did not push Dow futures back into positive territory - we may only get a dead cat bounce which necessitates further easing.

The Fed’s primary concern was increasing downside risks to growth, a deepening of the housing contraction and softening labor markets.

The announcement has driven the US dollar lower against every major currency with the exception of the Japanese Yen. Significant rebound has been seen in all of the carry trades.

Here is the Statement that the Fed released with the Emergency Fed Rate Cut

Posted in Fed Rate Cut, Fed Rate Cut Expectations