Fed cuts interest rate

[RedRalph]

From BBC.com

Fed cuts interest rates to 3.5%

Fed chairman Ben Bernanke is aiming to shore up confidence
The Federal Reserve has cut US interest rates to 3.5%, a shock three-quarters of a percentage point reduction.
Moving to shore up confidence in the US economy, the decision comes after sharp stock market declines on Wall Street and around the world.

The Fed said incoming information indicated a deepening of the housing market slump and a softening of the labour market.

One analyst said the Fed was "obviously panicked" by the threat of recession.

"Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York.

 

[Mise]

Blimey... This is going to be hard to justify.

 

[Mulholland]

Bad news indeed.

 

[bhsup]

Okay, I keep hearing recession thrown around. Isn't that a very specific thing? Something like a shrinking GDP for three straight quarters? I mean, it is a very definite and specific economic term, yes? So why is there a question about it? Why do some people say it is going on and some say it isn't? Shouldn't we just be able to look at the economic figures and say "yes" or "no"?

 

[JerichoHill]

Here's what's going on.

After the markets worldwide plummeted, the Fed committee met in an emergency session. Basically, it appears they feared a US market panic this morning and thus they cut by a huge amount in an attempt to pre-empt the market drop that was expected(about 500 points).

Of course, a panic move such as this may have the opposite intended effect. Who knows? We'll find out in about 15 minutes.

 

[Mulholland]

Okay, I keep hearing recession thrown around. Isn't that a very specific thing? Something like a shrinking GDP for three straight quarters? I mean, it is a very definite and specific economic term, yes? So why is there a question about it? Why do some people say it is going on and some say it isn't? Shouldn't we just be able to look at the economic figures and say "yes" or "no"?

I think it's because economic data is reported on a quarterly basis. It's hard to get a good idea of GDP is contracting when there is not yet the data to verify. We could be experiencing a recession in other words, we just don't have the numbers to prove it yet.

 

[JerichoHill]

Okay, I keep hearing recession thrown around. Isn't that a very specific thing? Something like a shrinking GDP for three straight quarters? I mean, it is a very definite and specific economic term, yes? So why is there a question about it? Why do some people say it is going on and some say it isn't? Shouldn't we just be able to look at the economic figures and say "yes" or "no"?

First, a recession is two consecutive quarters of negative GDP growth. So far, that has not occured. However, we do not have this quarter's figures so we can't say what conditions are at this very moment.

All signs point to the US heading into a recession, so that's why its thrown around. However, since data for each quarter comes out a few months after, normally by the time a recession is defined to the public we're already in the middle (and normally at the bottom) of it.

 

[RedRalph]

Here's what's going on.

After the markets worldwide plummeted, the Fed committee met in an emergency session. Basically, it appears they feared a US market panic this morning and thus they cut by a huge amount in an attempt to pre-empt the market drop that was expected(about 500 points).

Of course, a panic move such as this may have the opposite intended effect. Who knows? We'll find out in about 15 minutes.

In laymans terms, does it look as if something fairly serious on the way? Or just a blip?

 

[bhsup]

Gotcha. Thank you both

Though... wouldn't it really be better to wait for the figures? Remember the 1992 election? They kept talking about the recession the economy was in, but it turned out, once the figures were actually in, there was no recession? It just strikes me that this talk always intensifies during a Presidential election.

 

[JerichoHill]

In laymans terms, does it look as if something fairly serious on the way? Or just a blip?

Well, a recession is coming. But I knew that already. Fundamentals that I know of (and Whomp as well) seem to indicate that the market has now accounted for the subprime problem. However, we keep finding out that other financial firms were exposed to this risk, so to that extent we don't know what we don't see. I believe what is most important at this stage is perceptions and investor confidence. The Fed move was meant to bolster investor confidence.

This is a good article on what folks in the market should be doing:
http://www.fool.com/investing/general/2008/01/18/act-fast-and-kiss-your-returns-goodbye.aspx?source=ihptcltpa0000001

An investor who became unduly discouraged by a market drop and who allowed himself to be stampeded into selling at a poor price was 'perversely transforming his basic advantage into a basic disadvantage.'

That's from Roger Lowenstein's superb biography of Warren Buffett. The quoted section comes from Buffett's teacher, Ben Graham; Graham wrote that in the 1930s.

Gotcha. Thank you both

Though... wouldn't it really be better to wait for the figures? Remember the 1992 election? They kept talking about the recession the economy was in, but it turned out, once the figures were actually in, there was no recession? It just strikes me that this talk always intensifies during a Presidential election.

Well, that too.

 

[Mulholland]

Well, a recession is coming. But I knew that already. Fundamentals that I know of (and Whomp as well) seem to indicate that the market has now accounted for the subprime problem. However, we keep finding out that other financial firms were exposed to this risk, so to that extent we don't know what we don't see. I believe what is most important at this stage is perceptions and investor confidence. The Fed move was meant to bolster investor confidence.

This is a good article on what folks in the market should be doing:
http://www.fool.com/investing/general/2008/01/18/act-fast-and-kiss-your-returns-goodbye.aspx?source=ihptcltpa0000001

Jericho you never fail to to stamp out my hopes/fears of a disastrous 1930's style collapse. They should get you on the horn and let you give a public announcement to the traders today, you probably convince a lot of people to stay in for the long haul.

 

[Dubai Vol]

Another plunge for the dollar. Times like this it's nice to have an English wife, with all her investments in Pounds and Euros. Mine's all in real estate, because as the saying goes, they aren't making any more of it....

 

[JerichoHill]

1930s? Nah, no chance.

1979? Worst-case scenario. Depends on financial contagion.

I'm thinking it'll be worse than the tech-stock bubble burst and recession of 01. but not as bad as 1979. We've already probably ridden out a year or so of the problem, so we're not just now going downhill, we've been doing such for awhile.

I'm glad my job salary is indexed to inflation.

 

[JerichoHill]

Another plunge for the dollar. Times like this it's nice to have an English wife, with all her investments in Pounds and Euros. Mine's all in real estate, because as the saying goes, they aren't making any more of it....

Well, real estate would have been a poor choice of investment in the USA recently ...

Dubai, not so much.

 

[RedRalph]

More on this from BBC

Rate cut fails to end stock slump

Most stock market indexes are having a second day of losses


Read Robert Peston's blog
US shares have opened sharply lower despite the US central bank's shock decision to cut interest rates to 3.5% from 4.25%.
The Dow Jones Industrial Average fell 3.7% in early trading while the technology-based Nasdaq fell 5.0%.

European share indexes shot up on news of the cut, but then fell back again, with the FTSE down 0.3%, the Dax down 2.3% and the Cac 40 in Paris down 1.2%.

There is concern that the dramatic rate cut may be seen as a sign of panic.

"If it looks like panic at the Fed, smells like panic at the Fed, and quacks like panic at the Fed, well many will say it is panic at the Fed," said BBC business editor Robert Peston

 

[Dubai Vol]

Well, real estate would have been a poor choice of investment in the USA recently ...

Dubai, not so much.

Depends on where in the US you are investing.

Dubai, no question, is a very bad place to invest in real estate. Speculate, with a hope of short-term profit, yes, IF you time the market. But none of my money is invested here. Dubai is the definition of a bubble.

 

[JerichoHill]

Well, if you invested in the hot-spots their values are tumbling like GWB's popularity rating.

I am not a big fan of RE as an investment (other than a primary residence). Historical returns show that it mainly returns close to a rate of inflation.

 

[Dubai Vol]

I am not a big fan of RE as an investment (other than a primary residence). Historical returns show that it mainly returns close to a rate of inflation.

And for the great unwashed, matching inflation is a pretty good return. When you figure the REAL rate of inflation, as opposed to the official rate. And yes, my investmet is in my intended residence. I can get about all I want at $3000 per acre if I buy large tracts, and those idiots buying western North Carolina are evntually going to notice east Tennessee. But I hope never to sell anything. My investment is for me to enjoy. The deer raising their young in my forests are a real asset, and a delicious one!

 

[JohnRM]

Another plunge for the dollar. Times like this it's nice to have an English wife, with all her investments in Pounds and Euros. Mine's all in real estate, because as the saying goes, they aren't making any more of it....

If the US economy goes, Europe isn't that far behind.

 

[Mise]

Isn't the US savings-to-income ratio close to zero? Surely, no matter what the Fed does to the base rate, that will go up, if not because of consumers waking up to their massive debts, but because of falling house prices making people feel a lot poorer.

The same's happening in the UK, except here, inflation is much more under control (in fact, the massive discounting by retailers over Christmas and the New Year will probably bring it down some). Rates are fairly high as well, so there's room for a cut to soften the inevitable blow, and to make our currency less attractive without fueling inflation. That should allow our exports to pick up the slack from a sharp drop in internal consumption. And the Dollar's weakening will help exporters over there.

But the real question for me is: Who are we going to export to? Will Asia and the Middle East pick up where our consumers left off? Will they spend fast enough to cushion us?