Equity markets, particularly the Dow Jones Industrial Average, had a pretty severe whipsaw following the as expected quarter percent cut in the Fed funds rate. The Dow immediately dropped 100 points, then rallied 200. That begs the question: What was the market actually expecting?
The immediate 100 point drop following the announcement was either proof that some participants were holding out hope for a 50 basis point cut or a reaction to the somewhat hawkish tone by the Fed, which said in its statement, “The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.” Or in other words, we will give you this one be we are serious about this inflation thing now.
Ashraf Laidi, chief FX analyst for CMC Markets, says that the negative reaction was due to the language but that the corresponding rally was evidence that the market wasn’t buying the tough talk and thinks the Fed will come through with additional cuts.
And judging from recent Fed activity they seem more concerned about how the market reacts to it then the underlying condition of the economy. How else do you explain flooding the market with dollars as the greenback falls to all time lows? The large investment banks have huge losses from the subprime meltdown to manage. As market analyst Arturo Stern just pointed out me, “A quarter point cut won’t help people who are losing their homes,” but of course it may help the large investment banks in managing their billions of dollars of losses in the credit markets.
