3/4 of a Point - Did the Fed Overreact?
The market is based as much on perceptions as it is on fundamentals. Good feelings fueled the twin rises in equities (stocks) and real estate. Many were riding such a high that they could not see or even think about a bottom. The roller coaster was going up and everyone was giggling and enjoying the view.
But the roller coaster hit its summit, it is a really tall summit indeed, and as the people in the front car started screaming panic spread to the very last car. Now the perception is that we will never reach the bottom. Yeah, sure, a majority of the super smart (and they are super smart, don’t deceive yourself) on Wall Street don’t think the cars are going to jump off their tracks - but the panic is already spreading.
And that panic has just received some false authentication from our trusted financial oracles in the Fed. Seeing that panic was setting in throughout the world the Fed decided to signal that there really is something to worry about and lowered the fed funds rate .75% to 3.5% (this is the rate that banks charge each other on overnight loans). Instead of ushering in a rally and calming wary investor’s nerves all the Fed has done is freak out investors to the point where they might go nuts and rock the roller coaster cars off their tracks.
Compounding the mounting fear is the fact that they made this move a week before they were scheduled to meet. The market obviously sees this as confirmation that our market (and probably the global market) will derail. Why else would the Fed cut rates a week before they were suppose to meet if not because they thought we were on the cusp of a recession - or a depression?
This is the time in this piece when we go to a guy with a funny hat in Davos, Switzerland. The guy, from the Financial Times, is their lead economist. Here’s a link to what he has to say. It’s only three and a half minutes (plus a fifteen second commercial up front) and, if you are really impatient, the basic drift is just what I said. Well, all that I said and some further insight only a guy in the magical financial holy land of Davos can know about. Oh, and you’ll get to see the funny hat.
As I finish writing this on Wednesday at about 1:10 PM EST the Dow is down around 250 points. 250! AHHH, all is going to Hell! Sell everything! Go to the bank and get all your money out! Cash out the retirement fund! Put all your money under your mattress! We’re going to CRASH!
Obviously I’m kidding. The ride is going to get a bit bumpier before it gets better. It might last the year, maybe two, but the market’s ride will pick up again when cooler heads prevail. The Fed, chaired by a man whom I had such high hopes for, will eventually get it right and stop freaking investors out. But let’s be candid for a second. The Fed, although it matters a great deal, isn’t the be all and end all of our economy. If ours or any other economy, for that matter, could be magically improved by a policy switch made by the Fed then planned economies would still be all the rage.
The major determining factor for an economy’s success is the people who make up that market. Eventually the people will realize the situation they are in is not as dire as they fear and will go on living their lives and continue to work and make money at an ever higher clip. Every time a market panic has happened we were able to eventually weather the storm. This time will be no different. BigT
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