Oh dear …
Well, it wasn’t as if it wasn’t expected. Futures were pricing a 100% chance of a drop of 0.25% and a 50% chance of a drop of 0.5%. But I still think it was a dangerous mistake. Inflation is pulling at the rein and the speculative dynamic of stock markets continues to undermine fiduciary responsibility and sensible personal wealth management. (For more on these concerns, please see August GRI Equity Review here.)
The first sign that the rate cut wasn’t appropriate was the bounce in the stock markets. After the decision was announced all three major US indexes were up more than 1%.. The Dow Jones industrial average was up 1.37% at 13,587.54, the S&P 500 Index was up 1.87% at 1,504.29, and the Nasdaq was up 1.60% at 2,622.95. As of this writing markets are still open, and up.
There will be a speculative rush for a few weeks until the reality that interest rates are not the problem sinks in. Perhaps on a positive note, they could be increased again if inflation accelerates too soon.
The most unnerving conclusion, however, is that the Fed is not able to give the tough love the markets need, or, even worse, emotions and personal interests got in the way of the decision.
The lower rate will encourage another bout of gorging on debt and further extension of an unsustainable mountain of credit. Consumer behaviour needs encouragement to change, to become more practical. The sooner the better.
(And here’s another discussion of the Fed’s Irresponsible Move published in BusinessWeek.)