In the most breathlessly anticipated move of Ben Bernanke’s young career as Fed chairman, the Federal Open Market Committee just announced that it’s cutting the Federal funds target rate by half a percentage point, to 4.75%.
What does that mean? It means that the traders at the Fed’s open market desk in New York will start buying up lots of Treasury securities from brokers. This creates money out of thin air, and causes the interest rate that the banks charge each other on overnight loans to drop. You can read all about it here. The Fed also cut the rate that it charges banks that borrow directly from it, the discount rate, from 5.75% to 5.25%.
But what does it really mean? Are we going to have a recession? Are financial markets going to stop wigging out? Are there going to be more rate cuts? Nobody knows, not even Ben Bernanke. And if anyone tells you they do, don’t believe them.
The stock market loved the news, with the Dow rising 200 points immediately after the cut was announced. This was mainly because most people expected a quarter-point cut, and were happily surprised. But given the way the Dow has been jumping around lately, this means positively nothing. It could easily be down 300 points tomorrow.
For some reason I had been kind of hoping Bernanke and Co. would stand fast, just to stick it to all those whiners on Wall Street and in Detroit. But they did at least hold out all the way to their regularly scheduled meeting, and with all the signs of a weakening economy it would be kinda perverse to hold rates steady just to thwart Jim Cramer.
Update: Andy Busch, the global FX strategist at BMO Capital Markets in Chicago (the BMO stands for Bank of Montreal), offers this pithy assessment:
Yield curve steepens, stocks rally, dollar tanks, and gold soars. The market is now looking at expectations for Fed Funds to 4.25% by February. Given the recent drop in import prices and PPI, a lower dollar is a big benefit with little risk on inflation. It pumps up GDP by around .5% per quarter and offsets half of the losses from the housing sector.
Bernanke continues the Greenspan put and assists those that made poor credit decisions without the consequences of market discipline. Like a teenager with a car and no curfew, we’ll be having more problems down the road from these actions. But for now, who cares? Everyone’s happy and it keeps the politicians at bay. Jim Cramer is a modern day financial seer.