Bernanke Changes His Tune, Cuts Fed Funds Rate By 50 Basis Points


Today Bernanke and the Fed surprised most everybody with a 50 basis point cut to the Fed Funds rate.  The cut has been a potent catalyst for the stock market (Tue 9/18/07, Close):

Dow: +336 or 2.51%

S&P: +43 or 2.92%

Nasdaq: +70, or 2.71%

S&P Financials (XLF): +3.77%

Goldman Sachs (GS): +$12.89 (to $200.50), or 6.87%

Lehman Brothers (LEH): +$5.87, or 10.01%


I have to admit that this really caught me off guard

For one, ever since he’s taken over as Fed Governor Bernanke has been talking tough about inflation

He had a reputation as being soft on inflation from a speech in which he said the government could just drop money from helicopters if needed.  Hence the nickname “Helicopter Ben”. 

But since taking over Bernanke has talked a tough game and the “predominant policy concern” had always been inflation rather than economic growth.

For instance, as recently as the June 28 FOMC Statement the economy “seems likely to expand at a moderate pace… despite the ongoing adjustment in the housing sector” and “the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected” (Statement).

On August 7 the tune was much the same.  Despite a mention of volatile financial markets, tighter credit conditions and the ongoing housing correction, “the economy seems likely to continue to expand at a moderate pace” and the Committee’s predominant policy concern remained inflation (Statement).

The tune certainly changed on Friday August 17 when Bernanke cut the discount rate by 50 basis points intermeeting and stated that deteriorating financial market conditions and tighter credit conditions “have the potential to restrain economic growth going forward” and “downside risks to growth have increased appreciably”.  The Fed was “prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets” (Statement).

But it was certainly a shock to me to go from such tough talk on inflation to essentially a complete capitulation that economic growth is slowing dramatically.


For another thing, the dollar is at like 15 year lows against other major currencies

A big cut like this is negative for the dollar and it will discourage foreigners, who are huge investors in the US, from holding US assets.  I didn’t think Bernanke could do this with foreigners sucking up US assets to allow us to run massive current account defecits.

All the major currencies rallied strongly against the dollar today.  For example:

Euro: from $1.3867 to $1.3973, +.76%

Pound: from $1.9956 to $2.0122, +.83%


I think this means we are BACK IN BULL MARKET MODE, SHORT TERM.

If you look at charts of the S&P 500 (chart) and Dow Jones Industrial (chart) both of them blasted through their 50 day moving averages today.


It’s 35 points on the S&P from where we are right now at 1518 to recent record close of 1553 and 266 points on the Dow from 13734 to the 14000 record close set on July 19.

I don’t see any reason why those won’t be taken out in the next few weeks.

In other words, I think we are looking at one final, desperate, stratospheric rush higher before the implosion of the housing and credit markets makes it completely clear to everyone that we’re headed for a recession if we’re not already in one.

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