Business Daily from THE HINDU group of publications
Wednesday, Dec 19, 2007
ePaper | Mobile/PDA Version
Business Daily from THE HINDU group of publications Wednesday, Dec 19, 2007 ePaper | Mobile/PDA Version |
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Money & Banking
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Financial Markets Industry & Economy - Economy Columns - Financial Scan Fed cuts 25 bps, reserves judgment There is a threshold pain level at which government must come in – the only question is when and how. S. Balakrishnan The odds were for a 25 bps cut, but, when the Federal Open Market Committee (FOMC), which sets the benchmark Fed Funds and discount rates, did just that, the stock market was very disappointed. The Dow Jones Industrial Average fell more than 200 points. The much-read and dissected post-meeting statement conceded inflation risk is diminishing and growth risk increasing. It repeated the mantra of future rate decisions being guided by incoming data. This must be interpreted to mean that the Fed will not be inhibited from further softening monetary policy if the economy and financial conditions deteriorate. The ‘Greenspan put’ – short for assured Fed rate cuts to the rescue in turbulent markets – is alive and well under the reign of Greenspan’s successor at the Fed, Mr Ben Bernanke. Overreaction?So is Wall Street’s fall a case of overreaction? It is interesting to speculate if the market would have necessarily risen if the Fed had cut 50 bps. The assumption is clearly that the more the rate cut, the better it is for the market. But another view of an aggressive Fed move downside is that the economy and financial institutions are in worse shape than known. That could not have been good news for corporate earnings and the market. One can, therefore, put a positive spin on the 25 bps cut – things are not as bad as to necessitate 50 bps off. The current quarter is obviously going to be poor for the US economy. Are the three collective rate cuts of 100 bps in the last about eight weeks enough to pull the chestnuts out of the fire? It depends on how seriously consumer spending and bank lending are going to be affected by the housing crisis. No one (including the Fed) has a definite answer to this. Hence, the guarded FOMC guidance on rate cuts in the next meetings. A role for government in putting an end to the uncertainty seems necessary. But America proclaims it is the home of free enterprise and markets. Businesses and individuals alike must pay for their mistakes. Isn’t capitalism all about risk and reward? The snag with this argument is, of course, that things cannot be allowed to get to a point where the system itself collapses. There is a threshold pain level at which government must come in – the only question is when and how. Has the US reached that milestone is the billion dollar question. More Stories on : Financial Markets | Economy | Financial Scan | Interest Rates
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