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For anyone following the mortgage meltdown and subsequent market turmoil that has followed, it has not been a question of if the Federal Reserve would get involved, but rather when. And on September 18, we got our answer, as the Fed cut the federal funds rate by 50 basis points in an effort to lessen the impact of a poor housing market on the rest of the economy. So, like a good parent the Fed stepped in to bail out the hedge funds and sub-prime lenders largely to blame for the current situation in the first place.

Initially the tactic has seemed to work, as the rate cut prompted a substantial rally on Wall Street, with many investors seemingly betting that the worst of the financial crisis created by the problems in the housing market may be over. However, the rate cut leads to an interesting debate as to whether the Fed was fixing a major problem or paving the way for a new one. There are many reasons to argue that a big rate cut was the right move to ensure that the housing woes do not send the economy into a recession. However, some may argue that lowering rates will justify bad behavior on the part of financial institutions who were burned by subprime loans and bring back an era of "easy money" and cause even worse pain down the road.

So with the DOW once again approaching the 14,000 mark, should we all breathe a little easier, or did the Fed simply delay an inevitable market adjustment that is typically necessary to bring things back to stability?

Category(s): Valuation Thoughts
Posted by Jon Grupp at 09:58 PM | Permalink | Comments (0) | TrackBacks (0)