So, I was reading the Wall Street Journal this morning, including a front-page piece about the turmoil in the global markets yesterday. As recently as a few weeks ago, I was reading that the mortgage crisis was bad, but relatively contained. It would slow the U.S. economy, but not necessarily adversely affect foreign markets.
What a difference a few weeks make. Yesterday, fearing a U.S. recession, the markets tanked in Europe and Asia. The WSJ piece noted that the “unraveling markets” would pressure the Fed, which is scheduled to meet next week, while observers expected a cut in interest rates by a half-point.
The Journal added, “A cut before then isn’t considered likely, but can’t be ruled out if markets suffer badly. A rate cut just a week ahead of the Fed’s meeting would deliver only a modest additional boost to the economy and could risk looking panicked.”
An hour after I read that, I saw this.
The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.
The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest one-day rate move by the central bank since it cuts its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.
I guess the risk of “looking panicked” wasn’t that big a deal?
Obviously, the rate cut came before the U.S. markets even opened, presumably as a way of reassuring investors (i.e., begging them not to launch a massive sell-off). Early indications are that the move didn’t make much of a difference.
Stocks opened sharply lower on Wall Street Tuesday morning after markets fell around the world over the last two days. All the main indexes were down 3.5 percent or more. […]
Stock markets across Asia plunged even farther and faster on Tuesday than they had on Monday, as anxious sellers dumped huge numbers of shares on worries that an economic slowdown in the United States could drag down growth around the world.
The European stock markets initially followed their Asian counterparts lower, plunging at the opening and then see-sawing back and forth in frenzied trading as investors looked to the start on Wall Street for direction. After the Fed announcement, they had made up those losses and moved into positive territory, then fell back again. The rate cut was too late for Asian markets, which had already closed.
A decade after a credit crisis in Southeast Asia triggered an “Asian contagion” of stock market declines around the world, the credit crisis in the United States is now producing an “American contagion” to which no stock market seems immune.
I’m not going to pretend to be an economist; I’m clearly not. But I know that 10% market reduction is generally considered a “correction,” and we’re looking at a drop of about 20% since October — and it’s only Tuesday of what is likely to be a very difficult week.
“Where the bottom is now is anyone’s guess,” said Wesley Fogel, a market strategist for HSBC.
Stay tuned.
Update: Zeitgeist raises a point that is both amsuing and important:
“Hey, Republican candidates – show of hands – who has spoken in favor of replacing Social Security with private stock market accounts? C’mon, hold ‘em high – I can’t see them!”