When the Federal Reserve Board’s Open Market Committee made the surprise 50 basis point rate cut this week, the market reacted with a 300-point rally in the Dow Jones. Like the earlier discount rate cut in August, many analysts saw this as a positive and perhaps a sign of a bottom in equity markets, but what is the Fed really saying when they come in with an easing? It certainly isn’t “happy days are here again.” They are saying the economy has serious problems. And history tells us that, when the Fed recognizes a problem and decides to act, it is usually too late to avert the negative impact it foresees.
While equity indexes were racing towards its highs following the move, the dollar took out 15-year lows and gold was racing higher. Usually not signs of positive things to come. Yesterday the Canadian dollar moved past par with the U.S. dollar. Does the idea that something called the “loonie” can buy you more goods that the U.S. dollar give you confidence?
Also crude oil made an all time high above $83 and wheat, which rallied above $9 last week, is sitting at historical highs; two ominous signs in terms of inflation.
Jim Rogers is quoted in a Bloomberg story—prior to the announcement—that cutting interest rates would be a disastrous move and lead to a “serious recession”. And it remains odd, even counterintuitive, that the solution to a problem caused by too much easy credit would be more easy credit.
The Fed is non-committal in terms of what it will do in the future and perhaps its plan is to give lenders and borrowers some temporary breathing room while not committing to a long-term easing cycle. Hopefully people will use the move to lock in adjustable mortgages before the Fed goes about the business of fighting the inflationary cycle many analysts foresee. Rogers is quoted as saying, “[The Fed] should do something to stop inflation as soon as they can.” Adding, that it will only get worse in the future.
