Bernanke & Co. panicked over the weekend, abandoning their inflation watch and ordering a 75 basis point emergency rate cut. Wall Street (understandably) interpreted the move as a sign that the economy is now so bad that Bernanke is terrified, and reeling Wall Street is now demanding another 50 basis points cut next week.
Will the rate cuts work? Eventually. But if you’re looking for a quick turnaround, remember that cuts usually take a while (at least 6 months) to have any visible impact on the economy. Also, recall that in the last downturn, from 2000-2002, the Fed cut rates all the way down, and it took the stock market, at least, two years to bottom. (Along with advertising spending).
This downturn is similar to the last one, except that the engine of decline is the housing sector instead of the tech sector. The leverage that propelled housing prices to year after year of record highs is now unwinding, and the damage is spreading through the rest of the economy.
In recent weeks, the still-optimistic pundit majority has gone from saying “No recession!” to “Just a light recession!” The consensus is usually wrong, so we will likely have either no recession or a severe one. Based on the importance of housing to the economy, and the extent to which prices got extended, we’re in the “severe” camp.
Bear markets are characterised by violent upward moves that look like “the bottom” and lure traders back in. We’ll get some of those eventually (Hong Kong had one last night, up 10%). It would be nice if the next one really is the bottom–and legions of commentators will confidently declare it so–but we’re still hard-pressed to find any fundamental reasons for optimism. Everywhere we look, things are getting worse, not better..
Business Insider Emails & Alerts
Site highlights each day to your inbox.