Wednesday, January 23, 2008

Two Wrongs Still Make No Rights

Last month the Fed lowered the interest rates that banks and businesses pay by ¼% or 25 basis points. This was supposed to ease the pain being caused by the "Sub-Prime" mortgage meltdown caused by earlier Fed moves. Unfortunately the "market" and the world financial people were hoping for 50 basis points. As a result the stock market dropped and those of us invested in it lost a great deal of value in our retirement funds and portfolios.
This week the Fed realized the urgent need for further action and lowered the prime rate by ¾% or 75 basis points when most people were expecting ½%. This made the total of the two moves a full percentage point (the same as if they did it ½ each time.)
But the world markets plummeted once again.
Simply because this second move sent a signal that the Fed was afraid of the "R" word.
And all you have to tell an economist is that you think we are heading for a recession and, well you know.
Had the Fed made two moves of ½ point the end result on the rates would have been the same but the panic may not have been realized. Now there is almost a certainty that the geniuses will lower the rate one more time at their next meeting later this month.
The two earlier wrongs make the third move a necessity! One can only hope the third time is a charm.

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