I'm sure I'll get some responses here, but I do think Ben Bernanke did the right thing - and no it doesn't pertain to my 2007 bonus though he just guaranteed it <g>.
The Fed CANNOT cut like it did in 2001-2003, we all know that. So it's better to do it with shock and awe and at least try to stabilize the current situation and possibly create a fluid environment to come. Note: fluid does not mean bullish, it means the logjam gets cleared, lending standards get strict, companies go bankrupt...all healthy parts of the economic cycle. Right now NOTHING is happening because everybody is headless - that's not good either.
Before the cut, inflation expectations were contained - I have mentioned that break-even inflation rates were under 2% so in theory the Fed could do what it did in the context of weak housing, falling employment, risk aversion, etc.
Inflation expectations are now rising, so current Fed funds futures pricing is WRONG (predicting 4% next year), IMO, at least as it stands currently - the situation is dynamic of course.
We get a recession, we probably won't hit Dow 18k in Dec 2008 unfortunately.
All in all Helicopter did the right thing because he knows this is the only time he can do it. The Fed cannot arbitrarily cut rates, it can only do what the rest of the bond market allows it to do. |
