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Ben Bernanke Saved Today , But Will He Save Tomorrow? Jacki Zehner
With an extraordinary move, the Federal Reserve stepped in to catch the tumbling US equity markets. A shocking 75 basic point rate cut in advance of the market open, replaced the shallow words of the Bush administration with bold and aggressive action. Where Hank Paulson failed, Ben Bernanke succeeded. But now the question is, will it last?
Clearly the folks in Washington did not get much sleep last night, choosing instead to try to figure out how to prevent a Wall Street bloodbath. One only has to wonder how long it took them to figure out that the ONLY WAY to do that was to call in The Federal Reserve. “This was the biggest rate cut by the Fed since October 1984. And it was the first cut between regularly scheduled meetings since a half-point cut on the day the market reopened following the September 2001 terrorist attacks” reported CNN money. http://money.cnn.com/2008/01/22/news/economy/fed_rates/index.htm?postversion=2008012208
Of course we should be calmed by the fact that the Fed was ready to respond quickly, but should we not also be frightened at how worried they must have been do to it like this?
Thankfully the market did what it was told and rallied back from what was surely going to be a significant drop of approximately 450 points at the open. (CNNMoney). The DOW closed down 128 points (1.06%), which according to my trader handbook, is not a great result and still cause for concern. Tonight’s performance by the overseas market will offer key insights to the overall psyche of the investing world. This time around Ben Bernanke has put himself on the stage, and the markets will once again cast their votes. Buy orders mean thank you and all is well with the world, while sell orders mean thanks for holding the markets up for another day but I am out of here.
What has really changed since last night when the global markets plummeted? (Germany down 7.2%, India down 7.4%, Britain down 5.5%) Do Jane and Joe Jones suddenly get their house back? Does Countrywide go back to becoming one of the largest mortgage lenders? Are people going to run out and buy that time share in Florida? Can Merrill Lynch just forget about the $10 billion write-off? The party is still over.
On the positive side the Fed is pretty strong and the markets do tend to think in the shorter term. Many are calling for another fed move next week, after a regularly scheduled meeting which could calm the markets further. Additionally many argue that global equities are a lot cheaper then they were just a few weeks ago and there is plenty of value to be found in the longer term.
The question then becomes what about the long term? Will lowering the fed funds rate cure what ails the American Economy? And what about inflation? This aggressive Fed move will mostly give the administration some time to answer those questions, but then again, maybe not.