Financial Emergency: Fed Cuts Rates by 0.750%

Wow! 0.750% cut in rates. That means the Federal Funds rate is now at 3.50% and prime is at 6.50% (a full 1.750% reduction since September 2007).

This is a complete surprise. The Fed wasn’t going to meet until next week. A rate cut was expected, but with the plunge in global markets yesterday, the Fed comes out with an amazing slash and burn announcement.

Now, is this panic? I think it is. Instead of a cool approach, the Fed has just reacted to something it sees as drastic. Now, if the markets don’t pick up over the long term and the information comes out to be not as alarming as it appears then the Bernanke has a serious credibility issue on his hands. For the short term the Dow has reversed course.

Fundamentally, it is hard to move a multi-trillion dollar economy in the direction of your choice, why government insist on control of this monster I don’t know. I can understand wanting to influence it, but to try to achieve a complete course correction, that to me can only backfire. This is especially true when Washington’s fiscal house is such a mess. With deficit spending, weak exports and a falling dollar, a rate cut can only do so much!

From Yahoo Finance this morning:

WASHINGTON (AP) — The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest funds rate cut on records going back to 1990.

Only time will tell whether this was a good or bad move, but I don’t like the smell of it!

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