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What happened today?!
It began yesterday, when international stock markets plunged due to the global lack of confidence in the US economy. Investors worry that the imminent recession in the US will drag down growth in the rest of the world. So they sold off their stocks.
- The Japanese market dropped 5.7%
- The Australian market dropped 7.1%
- The Shanghai market lost 7.2%
- The Hong Kong market dropped 8.7%
The US market was closed yesterday due to Martin Luther King day, and as a result of the global selloff, opened 450 points lower than its Friday close. This was bad.
In response, the Fed made an emergency rate cut, lowering the target rate by ¾ of a percentage to 3.5%. Their scheduled meeting is for Jan 29-30, where they are expected to continue to lower the rates. The last time the Fed made such a drastic (0.75%) cut was 1984, and the last time it took emergency action was after September 11.
How will a rate cut help?
- As aforementioned, with our declining dollar, we have an increased reliance on exports. Turmoil overseas could negatively impact US exports, which would worsen our economic situation. The cut will help boost the international confidence in the US (which was the reason for the turmoil in the first place), and will help ameliorate the threat to our exports.
- Bernanke issued the cut because of a “weakening of the economic outlook and increasing downside risks to growth.” The cut will stimulate the market (stocks will regain their strength) and will stimulate economic activity (lower rates mean people don’t put their money in the bank because they won’t get as much return, which means they’ll spend it instead. Or at least Bernanke hopes they will).
How does this affect you?
- Well, your stock portfolio or your money market will regain it’s strength, slightly.
- Hopefully you won’t be laid off (rate cuts spur economic activity in an attempt to overwrite recession. recession means lower corporate earnings and, thus, employment cuts).
- Oof, but on a sidenote: after the Fed cut rates the dollar weakened against 14 of its 16 most actively traded counterparts. It fell by 1.2% against the euro, the largest fall in two months. That means higher risk of inflation, which means your money is worth less.
