Today’s 50 bps rate cut in the Fed Funds and Discount Rate has set everybody into a frenzy, and for good reason. It’s hard not to feel great – my accounts were up 2.72% today.
For the inflation-obsessed, today was a great chance to prove the point that Fed policy continues to be inflationary. The Dollar fell hard today against foreign currencies, gold, oil, and agriculture commodities.
Was the rate cut appropriate?
There are well-reasoned arguments on both sides of this debate but something has me feeling uneasy about this rate cut.
Bernanke promised not to bail out the banks and hedge funds that lent recklessly during the boom. If the rate cut isn’t a bailout, then why is everybody on Wall Street so damned excited today? The rate cut has instantly helped to “reflate” asset prices. This is hugely helpful to banks, brokerages, and the people that work there – bonuses are being saved by the Fed.
Practically speaking, the Fed really didn’t have much of a choice today — everybody expected at least 25bps and the bond market expected 50. Without this rate cut we would have had a resumption of the crazy volatility and almost certainly a worsening of the credit crunch.
By cutting rates today, the Fed is sending the message that they are more concerned with preventing a recession than they are about protecting the value of the Dollar. I won’t be selling my gold any time soon!