Dollar Bulls Cheer, FOMC Rate Cuts Are No Guarantee

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Fed cuts discount rate

The central bank, citing tough market conditions, cuts the symbolic rate half a percentage point.

NEW YORK ( — The Federal Reserve, reacting to concerns about the subprime lending crisis that’s rocked financial markets in recent weeks, Friday cut its so-called discount rate half a percentage point, to 5.75 percent.

The discount rate, the rate the Federal Reserve charges qualified lenders, mainly banks, for temporary loans, is largely symbolic. The central bank did not change its more closely watched federal funds rate, which affects credit cards, home equity lines of credit, car loans and other consumer loan rates. That rate remains at 5.25 percent.

But one economist suggested that the Fed’s discount rate cut has more than token significance. David Wyss, chief economist with Standard & Poor’s, said the cut could help convince banks it was okay to keep lending to companies or consumers that actually are creditworthy.

“This is an important move. It’s not just a symbolic action. The Fed is telling banks that the discount window is open. Take what you need,” Wyss said.

Wall Street cheered the cut. The Dow Jones industrial average surged 300 points at the open and finished the day up about 230 points, or 1.8 percent.

The Nasdaq composite closed up 2.2 percent while the S&P 500 gained nearly 2.5 percent. Stock futures were trading lower before the open after another wild day Thursday but surged following the Fed’s announcement.

“The Fed is trying to maintain some stability in the market. They can’t control the financial markets, which are being driven by emotion right now. But this move was a good option that will bring some relief to the market,” said Oscar Gonzalez, an economist with John Hancock Financial Services.

The Fed last met Aug. 7 and decided to leave both the federal funds and discount rates unchanged. One economist said if the Fed changed course on Friday and cut the federal funds rate, that actually may have spooked Wall Street.

“The Fed wanted to ensure liquidity to the markets but they don’t want to send a message that they are panicking. It was only a week and a half ago that they said the outlook for the economy was for moderate growth,” said Kenneth Kim, an economist with Stone & McCarthy Research Associates, an economic and bond research firm based in Princeton. “To suddenly turn around and cut the fed funds rate would have made them look foolish.”

Nonetheless, stocks have plunged further since the Fed’s last meeting due to fears that some financial institutions and hedge funds were in serious trouble because of the mortgage meltdown.

Mortgage lender Countrywide Financial (Charts, Fortune 500), for example, announced Thursday that it needed to tap an $11.5 billion line of credit because of liquidity problems. That came a day after an analyst at Merrill Lynch suggested that Countrywide might need to declare bankruptcy.

“The credit crunch is both real and driven by fear but primarily fear. Nobody knows who is exposed to these subprime loans. Uncertainty is the problem,” said Zach Pandl, an economist with Lehman Brothers.

With this in mind, several market observers felt that Fed chairman Ben Bernanke needed to acknowledge the risk that the subprime mortgage crisis could hurt the broader economy.

In a statement, the Fed said it took the move to “promote the restoration of orderly conditions in financial markets.”

In another statement, the central bank indicated that “financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.”

The Fed added that “although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably” and that the Fed was prepared to take more action if necessary.

The Fed, as well as other central banks around the world, had responded to the market turmoil by pumping more cash in to the banking system over the past week.

But many market observers felt the Fed would also need to lower rates to restore investor confidence, citing the example of former Fed chair Alan Greenspan.

Under Greenspan’s stewardship, the Fed cut the federal funds rate at an emergency meeting in 1998 as a result of the Asian financial crisis and also lowered rates at two unplanned meetings in early 2001 due to an economic slump and again that year after the Sept. 11 terrorist attacks.

While Greenspan was praised at the time for these rate cuts, some have since criticized him for helping to create a low interest-rate environment that fostered a culture of “easy money” where consumers who had poor credit histories were able to take out the types of exotic mortgage loans that are now defaulting.

One money manager said the Fed should not go ahead and cut rates to bail out consumers who took out loans they never should have – and the banks that made the loans and hedge funds that invested in them.

“The Fed is putting its fingers in the cracks of the dike,” said Matthew Smith, president and chief investment officer of Smith Affiliated Capital, an investment advisory firm based in New York. “There is nothing the Fed can do. They are just prolonging the inevitable. The Fed has to get the speculators out of the market.”

Wyss did not buy this argument though.

“If you enjoy cutting off your nose every time you have a cold, then not cutting rates would be a good strategy .There a lot of people who have this puritanical view that everyone should be punished,” he quipped. “But the Fed’s job is to worry about the whole economy. It has to make sure that rest of the economy doesn’t suffer. What the Fed did today has nothing to do with bailing out banks. If (banks) were going to lose money on a bad mortgage (they) will still lose money.”

With that in mind, the central bank’s next scheduled meeting is Sept. 18. According to federal funds futures listed on the Chicago Board of Trade, investors are betting that it is all but certain the Fed will cut the federal funds rate by at least a quarter of a percentage point.

Lehman’s Pandl expects a quarter-point rate cut in September and another one after the Fed’s two-day meeting in late October. That would bring the fed funds rate down to 4.75 percent.

But Pandl does not think the Fed will need to act before September since Friday’s move may be enough to reassure Wall Street that it has things under control.

“This is a good sign that the Fed is addressing the problems in the market. This buys them a little time. It’s the appropriate action,” he said.

Smith, however, thinks a rate cut would be a mistake since it’s far from clear that inflation won’t later become a problem.

“The Fed is in a bind. Weakening the dollar could boost inflation,” Smith said. “The problem is if the Fed cuts rates it could put the dollar into a bigger tailspin. Oil prices would go up. Gold prices would go up.”

Interest rates slashed to help economy

Fed’s dramatic action lowers target on key short-term rate for the first time in 4 years – to 4.75% – and signals more cuts could be coming.

NEW YORK ( — The Federal Reserve cut the target on a key short-term interest rate by half of a percentage point Tuesday to 4.75% in a bold acknowledgement that the central bank is concerned the mortgage meltdown plaguing Wall Street and Main Street could hurt the economy.

The Fed also indicated that more rate cuts could be on the way, news that investors cheered.

The Dow Jones Industrial Average surged more than 200 points immediately following the news of the Fed’s half-point rate cut and wound up finishing the day with a more than 335 point gain.
Fortune’s Andy Serwer talks with former Fed Chairman Alan Greenspan about the credit crunch and what it means for the housing market.

Stocks surged following the announcement, with the Dow finishing the day up more than 330 points, or 2.5 percent. The Nasdaq shot up 2.7 percent while the S&P 500 closed nearly 3 percent higher. Bonds fell, sending the yield on the benchmark 10-year U.S. Treasury up to 4.5 percent. (Bond prices and yields move in opposite directions.)

“This took some investors by surprise. It’s like the Christmas present you really wanted but weren’t really expecting,” said Gary Webb, chief executive officer of Webb Financial Group, a Bloomington, Minn.-based independent investment advisory firm with about $120 million in assets under management.

The cut to the federal funds rate, the first since June 2003, was widely anticipated by investors and followed a surprise cut to the Fed’s discount rate on Aug. 17. The only question was whether the Fed would lower the federal funds rate by 25 basis points or 50 basis points. (There are 100 basis points in a full percentage point.)

On Tuesday, the Fed also cut its discount rate by another half of a point to 5.25 percent. The central bank said that the vote to lower both rates was unanimous.

Some investors had thought that Fed chair Ben Bernanke would take a more cautious approach and not cut rates by such a large margin, because a half-point cut could signal the Fed was acting out of desperation to save the economy.

But Alan Skrainka, chief market strategist with Edward Jones in St. Louis, disagreed with that interpretation. He said Wall Street was cheering the rate cut because it proves the Fed is willing to take any moves necessary to ensure the economy is not derailed by problems in the subprime mortgage market, loans made to consumers with less-than-perfect credit.

“We’re having champagne and cookies,” Skrainka said. “This is not a magical elixir that solves our subprime problems overnight, but it is a big step in the right direction to keep the economy growing. The Fed is sending a strong message that it won’t get behind the curve,” he added.

The federal funds rate, an overnight lending rate that banks charge each other, is important since it influences the amount of interest consumers must pay for various types of debt, such as credit cards, home equity lines of credit and auto loans. The rate cut should help some beleaguered home borrowers who are set to see monthly payments on adjustable rate mortgages rise later this year.

In its statement, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally” and that the rate cut “is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

Chris Probyn, chief economist with State Street Global Advisors in Boston, said that with oil prices rising, consumer confidence sinking and the job market starting to show signs of weakness, the Fed made the right move to reassure investors.

“It was virtually a no-brainer to cut rates. Why risk destabilizing already fragile markets? This was an entirely appropriate response,” Probyn said.

Webb of Webb Financial added that Tuesday’s decision to cut the discount rate, which is what banks pay to borrow directly from the Federal Reserve, for the second time in a month is a sign that the Fed needed to do more to stimulate lending activity by nervous banks.

“The main reason the Fed had to cut both rates was the mortgage situation. That’s going to keep getting worse but this should lessen the blow and make the market recover sooner,” Webb said. “It will make cash more available for consumers and banks, good or bad. People that need money will go out and get it.”

And Probyn said the Fed, if anything, should have cut the discount rate even further so that it would be in line with the federal funds rate.

Although investors applauded the rate cut, another market expert cautioned that this does not mean an end to the credit crunch.

“People should not assume that the economy’s problems are over. That would be a mistake. They are significant and they are widespread,” said Larry Smith, chief investment officer with Third Wave Global Investors, a Greenwich, Conn.-based investment advisor with about $400 million in assets. “Today’s action, while important, does not put to rest the fears that emanate from the credit concerns.”

But Smith said the rate cut was a “bold step” and that he expected the Fed to cut interest rates at least one more time, probably by just a quarter of a percentage point though, before the end of the year.

The Fed’s next monetary policy decision is scheduled to take place at the end of a two-day meeting on Oct. 31 and its last meeting of the year is set for Dec. 11.

Another market watcher agreed that the Fed has room to cut rates further and dismissed concerns that more rate cuts would create another easy-money environment of the type that got borrowers and banks in trouble in the first place.

“Rates are nowhere near the 1 percent historic lows they were at in 2003 and 2004,” said Robbert Van Batenburg, head of research with Louis Capital Markets, a broker dealer based in New York. “The Fed has the luxury of leaving the window open for more rate cuts.”

To that end, according to federal funds futures on the Chicago Board of Trade, investors are now pricing in a 100 percent chance that the Fed will cut rates at least one more time before year’s end.

And Skrainka of Edward Jones said he expects the Fed to cut rates several more times during the next few months.

“This is the beginning of an easing cycle. This is not one-and-done move by the Fed,” he said.

But one economist said it is not guaranteed that the Fed will cut rates again in October.

Tom Higgins, chief economist with Payden & Rygel, an institutional investment firm based in Los Angeles with more than $50 billion in assets under management, said he thinks the Fed is trying to “snap the market out of its funk” with a big rate cut now so it won’t have to cut rates any further. With that in mind, Higgins thinks the Fed might hold pat in October.

But ultimately, Higgins said the Fed will have no choice but to cut rates again later this year. Today’s reduction, he said, will not be enough to get the economy quickly back on track since rate cuts typically take several months to have a broad impact.

“I think the Fed is hoping it won’t have to cut rates more but I doubt it will be successful. The economic data is likely to come in on the softer side over the next few months and they will have to move again,” Higgins said.

Markets In Europe, Asia Plummet After Central Banks Slash Rates Amid Coronavirus

Federal Reserve Chairman Jerome Powell has been a frequent target of President Trump, who has urged the central bank to slash interest rates more aggressively. Eric Baradat/AFP via Getty Images hide caption

Federal Reserve Chairman Jerome Powell has been a frequent target of President Trump, who has urged the central bank to slash interest rates more aggressively.

Eric Baradat/AFP via Getty Images

Updated at 5 a.m. ET on Monday

European shares dropped more than 8% on Monday, led by losses in Italy and France, the two countries hardest-hit by the coronavirus pandemic that has girdled the globe in recent weeks, infecting tens of thousands of people, severing supply chains and slowing commerce as people are forced to stay home.

In early trading, Italy’s FTSE MIB, France’s CAC 40 and Germany’s DAX were all down more than 8%, with London’s FTSE 100 just behind, dropping more than 7%.

The steep fall in Europe, which has become the new epicenter of the COVID-19 epidemic that started in China, came as Asian stocks also took a big hit. In Hong Kong, the Hang Seng index fell just over 4% and Japan’s Nikkei 225 lost nearly 2.5%. The Shanghai Composite Index lost nearly 3.5%.

The drubbing for stocks follows the U.S. Federal Reserve’s cut in its key interest rate to near zero, a dramatic move not seen since the depths of the 2008 financial crisis. The Fed’s move was made in coordination with efforts to buttress the global economy by the Bank of England and the Bank of Japan.

The one-percentage-point decrease was the U.S. central bank’s second emergency rate cut this month in an attempt to cushion the rapidly growing economic effects of the coronavirus pandemic.

The Fed also announced plans to buy $700 billion in government securities.

“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the Fed said in a statement announcing the moves Sunday. “In light of these developments, the [Federal Open Market] Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent.”

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Fed Chairman Jerome Powell, speaking with reporters on a conference call, said: “Families, businesses, schools, organizations and governments at all levels are taking steps to protect people’s health. These measures, which are essential for containing the outbreak, will nonetheless understandably take a toll on economic activity in the near term.”

The federal funds rate affects the cost of borrowing on everything from credit cards to auto loans.

President Trump — who has often slammed the Fed for first raising rates and then not cutting them more quickly — praised the actions minutes later.

“It’s really great news” and “great for our country,” Trump told reporters at the White House, adding that the Fed’s announcement should cheer financial markets. Just on Friday, Trump had said he could demote Fed Chairman Jerome Powell, whom he had appointed, from the top job at the Fed.

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But U.S. stock market futures dove after the Fed’s announcement. Futures in the Dow Jones Industrial Average fell more than 1,000 points.

In cutting its key interest to zero, the Fed has practically lost a major policy tool — one that it would need if the economy tumbles into recession. But the Fed said its policymaking committee “will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”

Low rates make borrowing cheap, but they don’t necessarily get businesses to increase workers’ hours or get people shopping at a time when government officials are asking bars and restaurants to shut down and telling workers to stay home to stall the spread of the virus.

In addition to the rate cut, the Fed also announced measures to “support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities.” It said it will boost its holdings of Treasurys by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion in coming months.

Global financial markets have been shaken deeply by the growing pandemic. And U.S. stock indexes have plummeted at least 20% from their recent record highs — putting the market in bear market territory after an 11-year winning streak. The Dow has fallen nearly 6,400 points since its record high on Feb. 12.

On Friday, the Dow jumped 9.3%, or 1,985 points, after posting its worst day since the Black Monday crash of October 1987. That rebound came as Trump declared a national emergency and announced several steps to deal with the coronavirus crisis. But the Dow still lost nearly 2,700 points for the week.

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“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed said Sunday.

The Fed last cut rates to near zero in December 2008, during the financial crisis, and kept them at that historic low until the end of 2020.

Sunday’s emergency move was highly unusual because it came between scheduled Fed meetings. The Fed’s next meeting is set for this Tuesday and Wednesday.

Market Extra

William Watts

Intermeeting move ‘reignited investors’ worst fears’: State Street’s Arone

Federal Reserve Chairman Jerome Powell speaks to reporters after the central bank cut interest rates in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus.

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The stock market tumbled Tuesday, with investors apparently rattled rather than comforted by the Federal Reserve’s decision to deliver a rare, emergency rate cut aimed at shielding the economy from disruptions caused by the global spread of COVID-19.

“I think the Fed’s rate cut backfired in many ways. Instead of soothing the market, it’s reignited investors’ worst fears,” Michael Arone, chief investment strategist for State Street Global Advisors, told MarketWatch in a phone interview.

Stocks initially jumped after the Fed announced a half-point cut, but gains proved short-lived. The Dow Jones Industrial Average DJIA, +2.24% fell nearly 1,000 points at its session low and ended the day down 785.91 points, or 2.9%, at 25,917.41, while the S&P 500 SPX, +2.28% dropped 2.8% and the Nasdaq Composite COMP, +1.72% lost 3%.

Meanwhile, investors piled into safe-haven assets, including Treasurys, driving the yield on the benchmark 10-year note TMUBMUSD10Y, 0.608% below 1% for the first time ever. Yields fall as debt prices rise.

What gives? Here’s what analysts and investors are saying about the Fed decision and the market reaction so far:

Fears that things may be worse than they look

While an interest-rate cut was good for a knee-jerk positive reaction in equity indexes, gains soon faded as the initial euphoria gave way to questions about just how worried policy makers must be to prompt such a rare move. It signals to investors “that policy makers are grasping significant uncertainty and rapidly mounting downside risks,” said Lara Rhame, chief U.S. economist at FS Investments, in an interview.

Wrong medicine for a supply shock

There is also the longstanding question of how effective monetary stimulus, and even some forms of fiscal stimulus, can be in the face of what is likely to be a “supply shock” — the type of economic hit caused by the absence of goods and services as the virus forces factory shutdowns and curtails transportation and travel. Monetary and fiscal stimulus is typically aimed at mitigating demand shocks, which are sharp cutbacks in spending by households, businesses or governments.

“A supply shock to the economy isn’t helped by global rates right now,” said Art Hogan, chief market strategist at National, in an interview. That said, there are concerns a supply shock will spill over into a demand shock as well, Hogan noted, and the Fed’s move appears aimed in part at providing insurance against that possibility.

Spotlight on fiscal policy

To the extent that policy makers can respond to the potential for an eventual demand shock, pressure will likely mount on politicians to provide a fiscal boost, potentially in the form of temporary tax cuts and other measures. That is even more the case outside the U.S., where major central banks, including the European Central Bank and Bank of Japan, have all but exhausted room for additional monetary easing, analysts said.

“I think the Fed is now saying we did the monetary side and it’s time to get the fiscal side involved,” said Leslie Falconio, senior strategist at UBS Global Wealth Management, in an interview.

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Bond proxies in demand?

The usual defensive sectors — utilities, consumer staples and real estate — were outperforming the broader stock market Tuesday. But with the 10-year Treasury yield below 1%, yield-hungry investors will be even more hungry for bond proxies to generate needed income, Arone said.

“Low rates are only going to exaggerate that demand, so utilities, REITs, staples — your classic high-yielding sectors — will be in greater demand regardless of their valuations or their business prospects just due to the fact that yields are so low,” he said.

Paying the price for ‘perfection’

Investors will likely remain at the mercy of headlines surrounding the spread of COVID-19 in coming weeks and months, but “there’s no doubt that equities have been way too complacent over the last several quarters,” Rhame said.

While last week’s lurch lower saw major U.S. stock indexes tumble from recent records into correction territory, investors had looked past slowing earnings growth, deteriorating revenue growth, margin compression and signs of moderating economic growth over the past year-and-a-half, she said.

How much of the market’s downturn “is closing the gap between fundamentals” versus a reaction to the coronavirus threat is very unclear right now, she said, but it is clear that of all financial markets, large-cap equities were previously “priced for perfection.” While investors will hope for some stabilization in equities, it seems clear that the low-volatility environment that prevailed in the final quarter of last year is gone.

“It’s all about managing volatility,” she said.

Gold: Bulls cheer the global drive to safeguard against COVID-19

Gold prices remain 0.52% up to $1,644.30 during the Asian session on Wednesday. The yellow metal surged the previous day as the US Federal Reserve followed the RBA in announcing rate cuts. The bullion’s current moves could be attributed to the latest catalysts showing a sustained drive to tame the economic implications of coronavirus (COVID-19).

Following the RBA’s 0.25% rate cut, the Fed surprised global markets with a 0.50% rate reduction, the first unscheduled move since 2008. The move propelled the rush to risk-safety as investors fear that the economic impacts of the COVID-19 are larger than initially feared.

Recently joining the league was the Hong Kong Monetary Authority (HKMA) that announced a 0.50% cut to its base rate. Also marking the global drive to safeguard against the deadly virus was the World Bank Group that announced a $12 billion immediate support package.

It should also be noted that China’s Securities Journal signaled that the People’s Bank of China (PBOC) will undertake additional open market operations (OMO) during the month.

Given the increasing efforts by global central banks, institutions, the market’s risk-off gained additional downside. While portraying the same, the US 10-year treasury yields drop to the fresh record low of 0.978% whereas S&P 500 Futures declines 0.41% to 3,009.

With that markets seem to have given a little importance to the US Fed policymaker Charles Evans who tried to placate traders after the Fed’s shock rate cut.

Technical Analysis

Unless closing below 50-day SMA level of $1,575, the bullion is likely to keep running upwards to $1,666 and $1,690.

Additional important levels

Today last price 1647.12
Today Daily Change 11.28
Today Daily Change % 0.69%
Today daily open 1635.84
Daily SMA20 1599.24
Daily SMA50 1570.79
Daily SMA100 1524.2
Daily SMA200 1486.41
Previous Daily High 1649.38
Previous Daily Low 1585.08
Previous Weekly High 1689.4
Previous Weekly Low 1562.94
Previous Monthly High 1689.4
Previous Monthly Low 1547.56
Daily Fibonacci 38.2% 1624.82
Daily Fibonacci 61.8% 1609.64
Daily Pivot Point S1 1597.49
Daily Pivot Point S2 1559.13
Daily Pivot Point S3 1533.19
Daily Pivot Point R1 1661.79
Daily Pivot Point R2 1687.73
Daily Pivot Point R3 1726.09

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