Emergency Fed Rate Cut (75bp) – And Why Resistance is Futile

January 22, 2008 | Posted by Jorge

Last night, the futures market showed the US markets dropping over 500 points on fears of an emerging recession in the US. While I was hiding in fear at the doctor’s office, Bernanke and the FOMC held an emergency meeting and cut interest rates by 75 bp, bringing both the Fed Funds Rate and the Discount Rate to 3.5% and 4%, respectively. The markets initially opened over 400 points down but quickly recovered within minutes and held steady throughout the day, closing down only 120 points.

Obviously some folks welcome the emergency cut and are looking for additional cuts next week. I believe the market, even with the emergency cut today, has another 50 bp baked in (in other words, they’re expecting another 50 bp next week). Here’s the problem I have with these cuts. First off, by cutting interest rates, how does that change the current situation we’re in? It doesn’t. Granted, I’ll help my parents refinance their mortgage and help them save a few bucks monthly, but for the banks and other industries in the market, this doesn’t change their current situation. It doesn’t change the still hot housing market we have (trust me, we’re barely making our $850 a month rent payments… for a 1 bedroom apartment in a small college town). All the rates cut give is hope. Last time I checked, you don’t invest on hope.

Did the 75 bp cut help Apple’s earnings today? By the looks of the 10% after hours hit they’ve taken, I don’t think so. And future cuts won’t help it either.

Hello? Recession? Is that you knocking on the door?

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