The Fed’s intervention this morning has a lot of people wondering what motivated the move, and whether it was the right thing to do. The two questions are intertwined because for many the question of whether the Fed should have intervened by lowering the discount rate depends, at least in part, on what they were trying to accomplish.
Many different reasons have been offered for the Fed’s action. The Fed itself cited deteriorating “financial market conditions, tighter credit conditions and increased uncertainty” as threatening lower economic growth. Larry Kudlow has said it was necessary to stabilize “the banking system and accommodating the huge cash demands that have arisen.” Others cite the recent seizing-up of the commercial credit market as directly influencing the decision to intervene. Still others wonder if the Fed acted to avoid a second burst of the kind of "once in ten thousand years market action" that damaged many large quant hedge funds last week. Some say the Fed action was necessary to stave off a huge drop in the major market indexes. This morning Jim Cramer was talking about fears of a 1000 point drop.
Although viewers responding to a CNBC poll approved of the Fed’s action by an overwhelming 96%, not everyone is convinced it was such a grand idea. Voters in DealBreaker’s poll this morning were far more divided. Just twenty-three percent said the Fed made the right move. Eleven percent thought the Fed didn’t go far enough. Sixty-five percent said the move was a bailout for the markets that posed moral hazard by reducing risk.
The Wall Street Journal’s Market Beat blog quotes Edward Chancellor as warning that this intervention may provide temporary reprieve but lead to bigger problems down the road. “Research suggests that severe financial crises tend to follow the rapid expansion of credit,” Edward Chancellor writes.
Rich Karlgaard of Forbes’ Digital Rules blog is also a skeptic.
One, the market was, on its own and before this morning’s Fed intervention, already rapidly repricing risk. After poking its nose into “correction” territory yesterday, the market quickly snapped back. Two, the U.S. and global economies are strong. Some readers will protest that paper and pixel panics can drag real economies underwater, but my take is that financial panics don’t usually begin inflicting such broader harm short of a 20% market drop…Three, inflation is a problem—a small problem now—but the Fed just gave it oxygen, water and food today.
So do we need to start talking about a Benanke Put?