Fed to the rescue

Apparently, there is a Bernanke put after all.

The Federal Reserve cut the target fed funds rate yesterday by 75 basis points to 3.5 percent. That had the desired effect on markets, as MarketWatch reports.

U.S. stocks fell for a fifth straight session Tuesday, but largely recovered from an opening rout sparked by a global sell-off as equities investors drew some reassurance from a massive, emergency interest rate cut by the Federal Reserve Board.

Down nearly 465 points after the open, the Dow Jones Industrial Average recouped the bulk of its early losses, and ended down by 128.1 points, or 1.1%, at 11,971.2, below the 12,000 mark...

Yields on 10-year Treasury bonds fell to 3.477%. The dollar dropped against its major counterparts, with the dollar index, which tracks the performance of the greenback against six other major currencies, down about 0.7% at 76.339.

Crude-oil futures trimmed earlier losses but still closed below $90 a barrel, with crude for March delivery off 71 cents, or 0.8%, at $89.21 a barrel on the New York Mercantile Exchange.

Elsewhere on the NYME, Gold futures gained $8.60 to end at $890.30 an ounce...

Overseas, European shares were bolstered by sharp gains in the banking sector after the Fed move, with the pan-European Dow Jones Stoxx 600 index ending up 2.4% to 316.17.

Willem Buiter got it right when he wrote yesterday before the Fed announcement:

Neither the ECB nor the Bank of England will panic at the sight of a large drop in global stock markets. I am less convinced of the sang froid of the Fed when faced with a chorus of Wall Street howls and whines. They could well be panicked into a 50 or even a 75 basis points cut in the Federal Funds target rate at their next meeting, or even arrange to have an interim meeting – a sure indicator of panic football.

In a later post after the Fed decision was announced, he calls the action "irresponsible".

This panic reaction is destabilising in the short run because it is likely to spook the markets. When the Fed loses its nerve, "things fall apart; the centre cannot hold". In the medium term it subordinates the price stability target to the real economic activity target. It also lays the foundations for the next credit bubble, after the recession of 2008 has become a distant memory.

James Hamilton appears to be more sympathetic.

... All the recent indicators have suggested a significant deterioration of real economic activity over the last two months. I take the global stock market sell-off as one more confirmation of that assessment, and new information about the global scope of the problems we face.

Nigel Gault says much the same thing.

The Fed's focus [on the weakening outlook for U.S. growth] makes sense, because although the plunge in global equity markets on Monday was the trigger for the Fed move, it was not the underlying cause. Both the financial markets and the Fed are responding to the increasing risk of U.S. recession and the danger that the United States will pull the rest of the world down.

The weakening in U.S. indicators since the beginning of the year has suggested that at least a mild U.S. recession is now more likely than not, and that vigorous Fed rate cuts are warranted. The plunge in global markets has prompted immediate action, instead of waiting until the next scheduled meeting on January 30.

All of which add weight to the view by Mike Larson that the "once in a lifetime low" yields of 2003 may be coming back.

In other central bank action yesterday, the Bank of Canada also cut interest rates at its scheduled meeting, lowering its target rate for overnight loans a quarter point to 4 percent. However, the Bank of Japan left interest rates unchanged.