Tuesday, September 18, 2007

The Fed's Big Move

Well, we got our answer. A .50% cut in key interest rates. The market has responded accordingly and traded much higher. But what is going to happen next? I thought it was interesting how inflation numbers, which are so easily manipulated, came in lower than expected this morning, which gave the Fed support for this cut. They clearly are taking a "shoot first, ask questions later" approach to this market. It could be purely economics, but who could believe that? There are political dynamics going on, as well as other interests.

The Fed, with all of its control, has become an instrument for people in charge to help control the market. Which is fine for investors, as long as we can quantify what their actions mean. This is the hard part. Its easy to know what will happen today, but how about the next couple of months? Does the surprising hefty cut mean things are worse than we thought? Or does it just mean that everyone was expecting a .25% cut and that would have left room for disappointment.

My viewpoint is that the global economy is strong, and the Fed feels that the US needs to keep up. The funny thing is that the other countries actually have real, organic growth and are RAISING rates to keep things under control. We have kept rates low so we can create our own earnings growth through stock buybacks and mergers and acquisitions. So we have to CUT rates in order to keep our market going up.

Something to think about as we move forward.

The image is used courtesy of Minyanville.com

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