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January 22nd 2008

Fed Dramatically Lowers Interest Rates

Last week, the New York Times published an article with the byline "Is the Federal Reserve‚Äôs chairman, Ben Bernanke too nice for the job?" Apparently, talk had been building on Wall Street that Bernanke was not tough enough to deal with the growing problems faced by the world’s largest economy.  Bernanke responded publicly in a speech in which he promised that the Fed would act quickly and decisively to confront such problems.  Then on Tuesday, the critics were silenced peremptorily by a Fed rate cut of 75 basis points, the largest single cut in two decades. Moreover, Bernanke intimated that additional rate cuts could come as soon as next week. 

It’s unclear how this activity will affect the Dollar.  On the one hand, it implies beyond a reasonable doubt that the US economy is indeed headed for recession.  Bond yields are declining and the stock market has lost 15% of its value since October.  On the other hand, the Fed has demonstrated that it is willing and able to take the necessary steps to avoid a hard landing at any cost. At the same time, investors around the world fear that a US recession will have an adverse impact on the global economy.  And where do investors park their money during periods of global economic uncertainty? Answer: USA. Sure enough, the Dollar has already begun to rally after taking a big hit immediately following the rate cuts.

Read More: Fed Rate Cut Halts Market Free Fall

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Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

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