# Fed cut rates today - why did market drop?



## z106 (11 Dec 2007)

Can anyone tell me why the market dropped today agter the fed cut rates?

As in - in lay mans terms,in 2 sentences,why does this make the market go down?

In fact - does anyone know of a good basic book explaining how the markets are related and how it reacts to different economic conditions such as interest rate cuts,war,rising oil,falling dollar etc.


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## ninsaga (11 Dec 2007)

Some insight here


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## camel (11 Dec 2007)

Because they were expecting a bigger cut. The US economy is in trouble and (apparently) needed a bigger shot in the arm. Cutting rates should put more money in peoples pockets, but not enough. Is that concise enough!!


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## beekeeper (11 Dec 2007)

The market had priced in exacty what happened so the only reason for the stockmarket reaction was that the market had overstretched itself on the top side.  This would prob best  be described as profit taking.  Its the toss of a coin from here as liquidity will be scarce from here till mid Jan.  Will more than likely see a retracement in the ISEQ tomorrow with the financials feelig the most heat.


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## markowitzman (11 Dec 2007)

buy the rumour and sell the news. If cut was half percent market would be more bullish. Funny today on cnbc with all "experts" flapping about prospective cut while Buffett was interviewed and was asked how the prospective fed cut would affect his investing decisions. He replied not a bit which pretty much stumped the interviewer!!


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## z106 (11 Dec 2007)

camel said:


> Because they were expecting a bigger cut. The US economy is in trouble and (apparently) needed a bigger shot in the arm. Cutting rates should put more money in peoples pockets, but not enough. Is that concise enough!!


 
I hear you knockin' camel !

Is there any book out there that someone can recommend for a novice that connects it all up in lay mans terms?
Something likde "the undecover economist" - but more related to the markets ?


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## gearoidmm (12 Dec 2007)

'A random walk  down wall street'.  Can't remember the author but excellent background

Also, read over the last few year's Buttonwood columns in the Economist magazine which I think is free now online.  Great explanations of what happens in the market


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## Sunny (12 Dec 2007)

The FED also didn't give as much guidance as usual with regard to future actions as they usually do as they try to get the market used to not being spoon fed rate actions in advance. Stocks had a bit of a hissy fit while bonds benefited but wouldn't be surprised to see stocks recover today. The FED are still easy enough to read as they are date dependent so if the economy keeps under performing the cuts will keep coming.


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## demoivre (12 Dec 2007)

qwertyuiop said:


> Can anyone tell me why the market dropped today agter the fed cut rates?
> 
> As in - in lay mans terms,in 2 sentences,why does this make the market go down?
> 
> In fact - does anyone know of a good basic book explaining how the markets are related and how it reacts to different economic conditions such as interest rate cuts,war,rising oil,falling dollar etc.



More selling pressure than buying pressure makes the market go down. *No *book or expert can tell you how the market will react in the short term, or indeed intraday, to economic or political events - sentiment will dictate direction. A 50 bp cut would not have guaranteed that the US markets would have risen last night. In the long term fundamentals should win out so it's with a view to understanding those that you should base your research.


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## Markjbloggs (12 Dec 2007)

The best expalination I've heard is that Wall Street was expecting (and pricing accordingly) a 0.5% cut.  It was almost lke trying to force the Feds' hand, like it did to Alan Greenspan so many times.  

What actually happened was that the Fed told Wall Street that it won't be it's biatch no more, and Wall Street sulked as a result.


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## Gautama (12 Dec 2007)

qwertyuiop said:


> ...in 2 sentences,why does this make the market go down?


 
The Fed cut rates because the US economy is in difficulty. This is a knock to the confidence of investors, causing them to sell shares.

An analyst on Morning Ireland predicts that the US economy will fall into recession in Q12008.
It's looking similar to the Dot Com Bubble Burst recession of 2000-2003. This will be the Credit Crunch recession of 2007-?.
The former had little effect on Ireland except for those working in IT.
The latter will have little effect here except for those working in construction industry.


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## silvamuppet (12 Dec 2007)

Markjbloggs said:


> What actually happened was that the Fed told Wall Street that it won't be it's biatch no more, and Wall Street sulked as a result.


 
Nahh, looks more like the Fed was the biatch in the end. They barked a bit but had the money supply deal with the other central banks up their sleeve which they knew would be running in tandem with the rate drop. Markets back up again at that particular news!



Gautama said:


> An analyst on Morning Ireland predicts that the US economy will fall into recession in Q12008.
> It's looking similar to the Dot Com Bubble Burst recession of 2000-2003. This will be the Credit Crunch recession of 2007-?.
> The former had little effect on Ireland except for those working in IT.
> The latter will have little effect here except for those working in construction industry.


 
This is the bigger concern. Rates going down over there hits the dollar rate. Exports to america become more expensive....bad for anyone here doing business with them.
Also does it get worse if oil (among other things) gets priced in euros and the american's ever dwindling currency makes oil even more expensive as a result. Who knows what the knock on effect of a recession and an economy in crises over there would have on USD denominated stocks (or rather how bad it would be).


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## Afuera (13 Dec 2007)

Gautama said:


> It's looking similar to the Dot Com Bubble Burst recession of 2000-2003. This will be the Credit Crunch recession of 2007-?.
> The former had little effect on Ireland except for those working in IT.
> The latter *will have little effect here except for those working in construction industry*.


Hmmm, this sounds like an oxymoron to me... The last time I looked, over 15% of our employment came directly from the construction industry. You can add in quite a large amount of jobs which are indirectly involved with the industry such as the real estate business, banking, insurance, white goods suppliers, delivery companies, shipping companies, solicitors, furniture stores, etc. to take that figure up a few percent more and then you start getting close to the real figure for the amount of jobs that could possibly be affected here. It's hard to see how it will have "little effect" if a quarter of the workforce are either fearful for their jobs or forced to take a cutback in pay.


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## z106 (13 Dec 2007)

silvamuppet said:


> Nahh, looks more like the Fed was the biatch in the end. They barked a bit but had the money supply deal with the other central banks up their sleeve which they knew would be running in tandem with the rate drop. Markets back up again at that particular news!


 
Ya - the market pretty much recovered completely today again.

But - explain this one to me - gold also dropped yesterday with the rate cut.
I thought gold is supposed to go up when rates drop no?
(Gold also recovered today by the way)

ACtually - I'm just editing my original post here - presumably,as a previous poster said,the market expected a bigger cut hence the drop in gold ?


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## Cantona (13 Dec 2007)

Pretty straight forward why the market was dissapointed on Tuesday night and no one has pointed it out - the market was crying out for a 50 point cut in the discount rate and only got 25 ! 100% of the Feds funds rate cut to 4.25% was priced in and a 28% chance of a 50 point cut to 4% had been priced in - so the reaction in equities was predictable.

Today, the Fed lowered the target federal funds rate and the discount rate by 25bps each, to 4.25% and 4.75%, respectively: a mix which was greeted as a disappointment relative to market expectations for a 50bp cut in the discount rate. Eric Rosengren of Boston dissented in favor of a 50bp cut in the funds rate. The accompanying statement was similar to the one following the September meeting: the FOMC expressed no risk bias but instead offered that increased uncertainty has clouded the economic outlook. 

After attempting to get ahead of the market at the September meeting, then trying to talk back market expectations following the October meeting, the committee appeared content to play it safe going into year-end. While the 25bp cut in the discount rate was a disappointment relative to market expectations, the degree of that disappointment was likely a surprise to the Fed, particularly given that it should have been seen as partly offset by the dovish dissent on the funds rate.  Reading through the lines of the statement, its would seem the committee -- like the market and private forecasters -- is more concerned with growth than with inflation.  However, the lack of a clear bias is not surprising given the need to use the statement to forge consensus. Moreover, the current inter-meeting period is a long one -- January 31 is over 7 weeks away -- and so the committee probably saw little upside to staking out a strong position on where they see developments headed: there will be plenty of opportunities to address market expectations in January, after the noise from year-end funding issues subsides. 

The growth paragraph of today's statement discussed the realization of some of the downside risks partly anticipated in the last statement -- "the intensification of the housing correction and some softening in business and consumer spending" -- as well as noting "the strains in financial markets." However, the discussion was by no means panicky, as the cumulative easing from the Fed "should help promote moderate growth over time."  The discussion of inflation was taken almost verbatim from the last statement.  As if to reinforce the point that the Fed "will continue to monitor inflation developments carefully," inflation merited another mention in the bias (or lack-of-bias) paragraph, as recent developments increased the uncertainty "surrounding the outlook for economic growth and inflation." (The September statement mentioned "uncertainty surrounding the economic outlook.") 

Given the prominence accorded to the discount rate at today's meeting, its natural to ask why the Fed didn't give the market what it wanted and lower the rate 50bps.  One simple answer would appeal to the age-old reasoning that central banks shouldn't always give markets want they want.  A separate reason would look to the fact that lowering the gap between fed funds and the discount window complicates the Fed's task of reserve management.  Without a Fed borrowing facility, a lending facility with a rate that is only marginally above the target funds rate caps upside moves in the intra-day funds rate without similarly limiting downside moves.  Additionally, last week's report on discount window borrowing suggests some of the stigma concern may be fading: this Thursday's report will give an interesting read on whether the Fed had been seeing the facility being tapped more in the days leading up to today's meeting.  Unfortunately, this is an area of Fed operations where communications are lagging: the FOMC minutes don't discuss discount rate moves and the discount rate minutes only discuss the rationale behind regional reserve bank requests, not the reason why the Board accepts or rejects those requests. 

Rosengren's dissent was a surprise.  If the past is any guide, Rosengren's dissent is likely representative of a larger faction within the committee that would also have preferred a more aggressive easing. In this regard, we would not be surprised if, once again, the minutes to today's meeting reveal a committee more concerned about growth than today's statement suggested.


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## Cantona (13 Dec 2007)

The "wall street journal" perspective in lay mans terms..............


WASHINGTON -- With a deepening credit crunch threatening to drag the
stalled
U.S. economy into recession, the Federal Reserve cut interest rates for
the
third time since August, and left the door open to further cuts.
But yesterday's moves, at the low end of Wall Street's hopes,
disappointed
investors, who had looked to the Fed to do more to thaw frozen credit
markets.
The Dow Jones Industrial Average fell sharply, undoing about a third of
the
run-up in stocks triggered in late November when top Fed officials first
publicly signaled that another rate cut was likely. The blue-chip
average ended
the day at 13432.77, down 294.26 points, or 2.1%.
The Fed lowered its target for the federal-funds rate, charged on
overnight
loans between banks, by a quarter percentage point to 4.25%. It also cut
the
discount rate, at which it lends directly to banks, by the same amount,
to
4.75%.
Fed officials, however, continue to consider ways of using various
tools -- including the discount rate -- to combat banks' unwillingness to lend
even to
each other, which they view as a threat to economic growth. The central
bank
could take action within days.
A variety of steps, widely discussed in the markets, are likely to be
on the
table, including another cut in the discount rate, longer-term loans to
money-market dealers, easier collateral rules for loans from the Fed,
and other
steps last taken in 1999 to alleviate funding pressures ahead of the
year 2000,
when many feared a "Y2K" computer bug would disrupt markets and create
economic
havoc.
Changes in the discount rate can be made by the Fed board in
Washington
without the approval of the entire 17-member policy-making Federal Open
Market
Committee, which sets the federal-funds rate target.
Some on Wall Street yesterday criticized the Fed's actions so far as
inadequate. "From talking to clients and traders, there is in their view
no
question the Fed has fallen way behind the curve," said David Greenlaw,
economist at Morgan Stanley. "There's a growing sense the Fed doesn't
get it."
Markets believe a weakening economy will force the Fed to cut rates
even more
than they expected before yesterday, Mr. Greenlaw said. Futures markets
anticipate another cut in January and a federal-funds rate of 3.25% by
next
fall.
In its statement yesterday, the Fed said that its quarter-point rate
cut,
which pushed the federal-funds rate a full percentage point below where
it
stood in early August, "should help promote moderate growth over time."
In October, the central bank said the risks of weaker growth and of
higher
inflation were roughly balanced, signaling it didn't expect to cut rates
again.
Yesterday, the Fed declined to give an explicit indication of its next
move. It
said it will assess financial and other developments and "act as
needed." The Fed's language left its options open for its next meeting in late
January.
The FOMC's 10 voting members approved the rate cut 9-1. Federal
Reserve Bank
of Boston President Eric Rosengren dissented in favor of a sharper,
half-point
cut. One FOMC member also dissented in October, but in favor of no rate
cut.
The shift in the dissents, from wanting less rate cutting to wanting
more,
shows the turn toward pessimism at the Fed.
"Economic growth is slowing, reflecting the intensification of the
housing
correction and some softening in business and consumer spending," the
Fed said yesterday. "Moreover, strains in financial markets have increased in
recent
weeks."
Unlike the previous two rate cuts, yesterday's wasn't portrayed as
"insurance" against improbable but potentially damaging economic
scenarios.
That suggests Fed officials view the economy as weaker than they
expected as
recently as late October.
Corporate executives are also signaling a more downbeat outlook. "I'm
not
going to put a happy face on this. Consumers are going to be a challenge
in
2008," General Electric Co. Chief Executive Jeffrey Immelt told
investors yesterday. But global growth is "as strong as ever," he added.
When Fed policy makers met in late October, financial markets were in
better
shape than they had been in August, and the economy had just posted a
strong
third-quarter performance. They chose to cut rates by a quarter point
and
concluded that would likely be enough.
But in subsequent weeks, markets reversed course as big losses tied to
soured
mortgage-related investments cut into the capital of major banks and
other
financial institutions, limiting their ability to lend. Fed Chairman Ben
Bernanke and Vice Chairman Donald Kohn signaled their increased concern
in speeches in late November, foreshadowing yesterday's rate cut.
Even so, investors, who have persistently had a gloomier outlook than
the
Fed, were disappointed the Fed didn't cut rates more or signal greater
willingness to do so. "Well, the boys blew it again. You wonder which
economy
they are looking at and what it is they are thinking about," said Alfred
Kugel,
Chicago-based chief investment strategist for investment-management firm
Atlantic Trust of Atlanta.
Bond prices shot up yesterday and yields, which move in the opposite
direction, fell sharply. The 10-year Treasury note's yield dropped to
3.97%
from 4.1% just before the announcement, while the two-year note's yield,
which is especially sensitive to expectations of Fed action, fell to 2.92%
from
3.13%. Yields on corporate bonds rose relative to Treasurys.
Major banks, meanwhile, lowered their prime lending rates, the
benchmark for
many consumer and business loan rates, to 7.25% from 7.5%.
The Fed has found it especially difficult to discern the economy's
path and
thus the right level for rates because the main threat facing the
economy is
the reluctance of banks and investors to lend to home buyers, businesses
and
consumers. That's harder to measure than the things that usually drive
the
business cycle -- such as profits, inventories, employment and the Fed's
own
interest-rate actions.
Brian Sack, an economist at Macroeconomic Advisers LLC, said that in
2001 the
major shock to the economy was the stock market. "We have a better shot
at
trying to calibrate those wealth effects, whereas the credit turmoil has
many
dimensions to it. Frankly it's hard to assess how much economic
restraint you
get from those various dimensions."
In the past month, data on the so-called real economy have been soft
but not
dramatically so. Macroeconomic Advisers said yesterday it now expects
economy to shrink marginally during the current quarter, then grow at a
1.8%
annual rate in the first quarter of 2008.
On the other hand, credit markets have tightened sharply. Since Oct.
31, the
yields on securities backed by auto loans have jumped to 6.3% from 5.4%,
while
yields on securities backed by home-equity loans have jumped to 7.7%
from 6.6%,
according to J.P. Morgan Chase & Co. Rates on "jumbo" mortgages -- those
larger
than $417,000 -- are around 6.9%, up from 6.6%. The London interbank
offered
rate, the rate banks charge each other for three-month loans in the
offshore market -- is a full percentage point above the expected federal-funds
rate; it
is typically less than a tenth of a point higher.
There isn't yet evidence these higher rates have significantly bit
into
consumer spending, outside of housing, and the rates could drop after
year-end
funding pressures ease. But investors generally don't expect that to
happen.
A survey by Macroeconomic Advisers of 55 clients, mostly hedge funds
and
other sophisticated investors, found most expect little retracement of
the wide
spreads between yields on risky debt and Treasury yields by next year,
and most expect banks to curtail lending. "The possibility of a widespread
pullback in
credit availability is a significant risk to the outlook," the firm
said.


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## Markjbloggs (13 Dec 2007)

Cantona said:


> Pretty straight forward why the market was dissapointed on Tuesday night and no one has pointed it out - the market was crying out for a 50 point cut in the discount rate and only got 25 ! QUOTE]
> 
> Oi, you arrogant French collar-up person, I pointed it out before you!!!!
> 
> The best expalination I've heard is that Wall Street was expecting (and pricing accordingly) a 0.5% cut.


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## Cantona (17 Dec 2007)

Markyjbloggs - I was pointing out that the market was crying out for a .5% cut in the *discount rate* (the rate at which banks borrow from the fed) not the fed funds rate, which only had a 28% chance of a .5% cut priced in !!

This is why I rarely reply on this site, as I end up conversing with idiots who are clearly less intelligent than me.


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## kellyiom (17 Dec 2007)

when the seagulls follow the trawler and all that! Just on the gold, this isn't moved so much by interest rates directly when the central banks move them but more by FX, particularly JPY/USD and EUR/USD.


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## Markjbloggs (17 Dec 2007)

This post will be deleted if not edited immediately H dude, lighten up, I was only pulling your chain.....



Cantona said:


> Markyjbloggs - I was pointing out that the market was crying out for a .5% cut in the *discount rate* (the rate at which banks borrow from the fed) not the fed funds rate, which only had a 28% chance of a .5% cut priced in !!
> 
> This is why I rarely reply on this site, as I end up conversing with idiots who are clearly less intelligent than me.


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