The “Beard Of The Beltway” Blasts The Market
Posted by Martin Denholm on January 23, 2008
Well, they did it. They just couldn’t wait.
Actually, one of them wanted to – St. Louis Fed President William Poole. But in an overwhelming 8-1 vote, he was the lone voice among the Federal Reserve’s monetary policy committee, who dramatically galloped to the rescue on Tuesday, January 22.
With the U.S. markets closed in observance of MLK Day, American investors fidgeted on the sidelines. But it didn’t take long before idle fidgeting became full-fledged panic, as they watched the global stock markets melt down in spectacular fashion and seemingly fight it out for the dubious honor of worst performer of the day. Many indexes posted their worst losses in years.
Cue Bernanke & Co. With every index awash in a nasty shade of crimson, the Fed bankers convened via video conference, loaded the gun, and fired the bullets into the market. A sweeping 0.75% interest rate cut.
The Dow Industrials did collapse by 465 points, but investors took crumbs of comfort in Bernanke’s leadership and the Fed’s active role in trying to save the economy. The index recovered to close the day down “only” 128 points, averting the widely predicted catastrophe.
But while the Fed’s move might have eased the problems a little, it certainly hasn’t fixed them. The question is: What does all this mean for us - the smarter investors?
Fed To Market: “We’re Chopping”
The Fed’s move was all-but telegraphed.
In my years of covering the economic world, I’d rarely seen such refreshing clarity from a Fed chairman (granted, most of those years featured the crusty “Master Of Vague” himself – Sir Alan Greenspan!)
So when Ben Bernanke (a.k.a. the “Beard Of The Beltway”) said: “… additional policy easing may be necessary… We stand ready to take substantive additional action as needed to support growth… The FOMC must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.”
Simply put: “We’re going to swing the axe until we bludgeon the U.S. economy into submission.” Or so the Fed hopes.
The Dreaded “R” Word
Confronted with a potent mix of declining GDP growth, a crumbling real estate market, a crushed stock market, high energy prices, debt-laden consumers, and the ever-present specter of inflation, the Fed has a real conundrum.
And now, the dreaded “R” word has reared its ugly head. Both Alan Greenspan and William Poole have stated that the odds of the U.S. economy sliding into recession are rising. And the Fed is using all its weapons to save the day. A noble effort. But it might just blow up in the bankers’ faces, too.
Since September alone now, they’ve cut interest rates by 1.75%. And such relief takes time to work through the financial system. The bankers have indicated that they may well cut again at their regular January 30-31 meeting if the economy and stock market hasn’t shown any signs of recovery.
They’re giving it a week? Come on…
By preparing the market for more cuts, they’ve nailed their colors to the mast and there’s now a chance of either disappointing the market or overdoing it. Not to mention the risk of triggering another inflationary spike.
But there are steps you can take to mitigate this volatile market and ensure that you’re not only protected, but are also making money too…
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