Although the magnitude of the rate cut seemed to sit well with the stock market, as a pragmatist, I see much to be concerned about with the size of the reduction and with the new target. As to the size of the reduction, the Fed has clearly signaled that they are very concerned about the snowball of a declining economy that just keeps getting worse. Beyond the size of the reduction, the Fed's accompanying statement was equally ominous, “The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
Although clearly a necessary move in light of the direction of the economy and the size of the Madoff fraud, a target of 0% means that the Fed can no longer use interest rate movements to bolster the economy. Although it still has tools available, an important tool is effectively used up.
Our economic policymakers are up against a plethora of problems...any one of which, by itself...would do real damage to our economy. Together they are crippling our economy.
We have witnessed the collapse of our investment banking firms, then the effective insolvency of the commercial banking system, and now we will likely see the meltdown of hedge funds.
Every day, in almost every way, I become ever more concerned that the pessimistic view of the economic future that I wrote about back in October is regretfully becoming painfully real. I continue to believe that smart companies and prudent individuals will stop asking how long the downturn will last and will instead get on with positioning themselves to prosper in tough times that are likely to last for years. Anyone doing "business-as-usual" with an expectation of a quick tunraround is sure to experience sever financial pain.
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