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Most Recent Events
The Federal Reserve (the Fed) and other central banks around the world acted in concert yesterday in attempts to:
- Spur economic activity
- Provide a positive signal to financial markets that were in desperate need of good news
In an unprecedented move:
- The Fed reduced its target federal funds rate by 50 basis points—to 1.50 percent from 2.00 percent.
- The European Central Bank (ECB), the Bank of England, the Bank of Canada, and the central banks of both Sweden and Switzerland enacted similar 50-basis-point rate cuts.
- The central banks of Australia, China, and Hong Kong had already reduced their target rates in the past day.
The move represents a drastic policy shift for the ECB in particular, which had steadfastly maintained that it would not cut rates in the face of persistent inflation concerns.
The Fed, on the other hand, had become increasingly concerned about weakening domestic economic conditions. The timing of its move—three weeks before its next scheduled meeting—and the unanimous 10–0 vote in favor of the rate cut indicate the sense of urgency with which it acted.
Resulting Impact
Markets have seesawed today in the aftermath of the announcement.
- We view the move as an extremely positive next step in the efforts by the Fed and the Treasury to address continuing economic concerns for the longer term.
- It is also likely that Fed Chairman Ben Bernanke will tread cautiously in dropping rates further from here.
- We expect the next phase of the debate will likely be increased rhetoric calling for Congress to enact additional fiscal stimulus programs.
- By John Blood, CFA, Chief Market Strategist, Commonwealth Financial Network
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index.
© Copyright 2008 Commonwealth Financial Network
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