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My Two Cents

The Fed Rate Cut

Chris Farrell Jan 22, 2008

The markets are always dominated by narratives, attempts to make sense of the world. Only a few weeks ago, going into the New Year, the dominant story was yes, the U.S. might sink into a recession, but the rest of the world would keep on growing. The jargon phrase was “decoupling.” Over the long weekend that story stopped working. Instead, the realization grew that if the U.S. sank into recession it would have a dramatic impact on business in China, India, and elsewhere.

What has the Fed accomplished with its 0.75% slash of its benchmark interest rate. The Fed, along with other central bankers, will stop a global financial collapse. And that’s vital.

But a U.S. recession seems inevitable (if we aren’t already in it). Consumers are still pulling back. So are bankers. And the housing market is spiraling lower.

The real danger is if investors have truly lost confidence in the Fed. After all, fiscal policy is a disgrace. So, closely watch what happens to gold, the dollar, and U.S. Treasury Inflation-Protected securities over the next couple of weeks.

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