The Wall Street got the rate cut from the Fed that it was looking for. The Federal Reserve cut its benchmark interest rate by 50 basis points to a half-century low. The Fed's statement cited "downside risks to growth." However, it was a disappointing finish on Wall Street. A turbulent final hour of trading left the Dow industrial average with a loss for the day.
The culprit appeared to be dumping by hedge and mutual funds. The Dow was up as many as 298 points before the dramatic sell-off in the final minutes.
Alfred Goldman of Wachovia Securities continues his after market commentary saying "General Motors climbed 51 cents to 6.76 amid reports of a tentative merger pact with Chrysler. Energy shares were higher as crude oil rose for the first time in four days. Oil gained nearly $5 a barrel on hopes a loosening of credit will give the economy a lift and drive demand. The rate banks charge each other for three-month dollar loans declined for the thirteenth straight day.
"The Dow closed down 74.16 points at 8990.96. NYSE volume totaled 1.62 billion shares. The S&P 500 fell 10.42 points. The Nasdaq rose 7.7. Advancing issues beat decliners by 5-3 on the NYSE and by 3-2 on the Nasdaq. The 10-year Treasury note fell 2/32 to yield 3.84%."
Scott Grannis explains that the Fed rate cut is not what matters
Everyone seems very excited about another Fed rate cut, but that's missing the forest for the trees. The seeds of a recovery from this financial crisis have already been sown. Whether the Fed funds rate target is 1.5% or 1% is not going to make much of a difference.
The big changes to focus on have already happened:
The Fed has quadrupled the amount of bank reserves in the system in the past six weeks, enough to easily accommodate the world's sudden thirst for dollars.
The Fed has pumped $100 billion or so into the Commercial Paper market in the past two days, in order to alleviate a drastic shortage of liquidity.
Swap spreads are way down from their highs, reflecting an easing of tensions in the institutional money markets.
Real yields on 5-year TIPS have doubled in the past three weeks, ostensibly because of collapsing commodity prices and deflation fears, but really because the prospects for the economy have brightened considerably (the economy is much more likely to grow with oil at $65 than with oil at $150).
The dollar has jumped almost 20% in the past two months, pulling back from the abyss it was headed into earlier this year and reflecting a more balanced assessment of the economy's prospects.
Posted by Scott Grannis of Calafia Beach Pundit.
CNN writes that there are economists that question the effect of the Fed's rate cut. "One economist questioned whether rate cuts really can make much difference since the current credit crunch is limiting the availability of funding. The problem isn't that loans are expensive. Banks are simply unwilling to lend.
"The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets," said Bernard Baumohl, executive director of The Economic Outlook Group. "What is needed more than anything else at this stage is simply patience."
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