Fed Rate Cuts Send Stocks Soaring
Wall Street found a good friend in Ben Bernanke and the FOMC as they oped to bail out hedge funds, investment funds, Wall Street brokers, and stock investors at the expense of the American Dollar and prudent savers.
The 50 basis point rate cut in the Federal Funds and Discount rate was quite enough to send stocks soaring, at least for now. The Dow Jones Industrial averages were up over 300 points on September 18th, the date of the rate announcement, and closed the week at 13,820.19.
The Fed has given a clear signal that it will provide all of the liquidity that the US financial system requires to stay afloat. The stock market received new legs from the sea of liquidity. However, there is a price to pay.
The rate reductions signaled to the foreign exchange markets that the Federal Reserve bank is willing to see the weak US Dollar trend continue and to accelerate. A rapid uncontrolled descent of the Dollar may have in fact been kicked off by the Fed’s rate decision. A collapse of the Dollar from here is not a good thing for the US or world economy.
For one thing it will effect the ability to keep borrowing huge amounts of funds from countries like China and Japan. These countries have already signaled that they are weary of supporting the funding needs of a US government that can’t seem to manage its bad spending habits of spending far more than it takes in. In the long run the US will find that deficits do matter.
Other issues that the US will have to face as the Dollar falls is an increase in the inflation rate as all imported goods become more expensive in US Dollar terms. In addition, there is a strong possibility that interest rates in the US will soon soar as the foreign lenders that we so much depend upon become ever more reluctant to lend additional funds to a county with severe on going credit problems.
With October and another round of ARM resets not that far away it might be a very good idea to sell as the Dow approaches its all time high of about 14,000. The stock market will likely follow the Dollar down once the knee jerk reaction to the latest rate cuts have worn thin.
