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Wednesday, December 12, 2007

Fed Action

I don't think the 'new' Fed under Bernanke has made any huge mistakes, and I think Bernanke is continuing, as Greenspan has said in interviews, in much the same way his predecessor might under the circumstances. But this recent rate cut move I find interesting. The Fed cut interest rates by 1/4% (25 basis points), which they had to know was lower than what the market was hoping for. Stocks plummeted. But then the Fed made the unusual call of very strongly saying that more rate cuts are to follow - ie - don't worry stock market, we are here to help. Consequently, stocks soared today (or this morning at least). Either the Fed should have been quicker with their statement, or they should have said nothing at all. Instead, they only added to the stock market's volatility.

An interesting point: why is it that stock investors didn't already THINK that rates were going to be cut more in the future. If they DID think that prior to the Fed's announcement, we would have expected that expectation to already be accounted for in stock prices - hence we would not have expected the surge today. But the surge happened, and ceteris paribus, that must imply that the meat of the announcement was a welcome surprise. All this makes me think that stock investors are really just as much concerned about inflation - or more to the point, they think the Fed is really concerned about it....

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