Why a Fed cut today?

Barry Ritholtz makes some observations:

2) Equity Market Disfunction? Is it that the equity markets are not working properly? Likely not. Are rates too high? I doubt that's the reason for any of our economic woes. Then what is it – are lowered equity prices a problem?

Globally, equity markets have been in the process of “Repricing Risk” – why is the Fed disrupting that? Further, there is now a recognition that S&P500 earnings were priced way too high – especially in the event of a European and Asian slow down. That lowered “E” in the P/E adjustment is also under way.

4) How Independent is the Fed? The Fed is supposed to be an independent entity, whose mission is a) price stability (inflation) and b) maximizing employment (growth).

However, today’s action reveals an apparent third obligatory goal – protecting investors and market prices. I had no idea that back-stopping speculators and hedge funds was part of their mandate...

The markets are (properly) repricing risk, which means lowering the value of equities, yet the Fed is acting to stop that process. How odd.

Oh, and Ritholtz thinks today's cut might be followed by another 3/4% cut next week. Wow!


posted by Quiddity at 1/22/2008 08:15:00 AM