the fed (if financial stuff makes your eyes cross, do yourself a favor and don’t read this.)

So, the fed cut its overnight interest rates by a whopping half a percentage point to 4.75% and the US stock market soared.  The Dow up 335.97 points.  Now I know people were gunning for a cut, hoping for a .25 %. Praying that Ben Bernanke would not leave the rates as they were.  My question is would he have moved so strongly if there hadn’t been the run on the Northern Rock bank in England?  All those people lined up to withdraw their life savings.  The bank whose stability was being challenged because of some of its mortgage investments.  Yesterday, over 2 billion dollars withdrawn.  Was it that extra jolt that goosed his behind into making this large a cut?  Did he do the right thing?  The stock market thinks so.  Just look at the surge.  However, why didn’t gold drop in the face of such celebrating in the stock market?  Isn’t cutting the overnight interest rates saying that inflation is not a worry?  Then why is Oct. gold up $8.07?  And why did the US dollar dive to 1.01380 CAN?  Could it be that foreign investors have decided that with the sinking US dollar and now a cut in the interest rates, that it is costing them too much to hold US treasury bills?  And if that is indeed what is happening, this interest rate may not be something to rejoice about.  Short term, possibly.  Long term, a much grimmer story.

Posted by Meg Tilly on Tuesday, September 18, 2007 in Chewing the Fat

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