Don't rejoice just yet....

The Feds decision yesterday to slash the funds rate to 4.75% from 5.25% was applauded by many and buoyed the indices sending the Dow up 336 points!
The funds rate is the rate at which depositary institutions lend money to each other and oft used to control the available supply of funds thus influencing interest rates on both commercial and consumer loans.

That the decision by the FOMC was anonymous tells us that they finally realized making a preemptive move to forestall a recession was much smarter than waiting for the worst then using a series of financial fibulators thereafter in an eleventh hour attempt to jolt back the economy to life. What difference a month can make, during their last meet, economic weakness took a back seat to inflationary pressures which they still have to deal with now that they have loosened up the supply of money.

I expected 25 basis points and a statement littered with fed jargon that leaves room for more cuts in future meetings based on careful introspection of the now manifest hazards borne from careless lending standards whose effects we are reeling.

In cutting the all important rate, the Fed choose to deal with the larger evil, thwarting a recession that was caused by lenders with loose credit standards who primed their balance sheets by charging high rates and packaging exotic mortgages to the hoi polloi borrowers who were plagued with poor credit and otherwise afford homes. In my opine, it is not the job of the central bank to bail out speculators and greedy banks but rather maintain sound fiscal and monetary policies with an aim of ensuring growth while balancing inflation.

I guess since the credit mess was going to trickle down and start nibbling away at the economy, especially since consumerism is the key driver for growth-Well, when people are at risk of or loose their homes, they can no longer use them as ATM’s or feel comfy about future prospects, budgets are ultimately tightened and that lack of spending will eventually hit most sectors of the economy hard thus slowing growth rates and earnings. Alarm!

In the short term the rate cut will help the hoi pollioi, who took out ARM's, breath easy because payments will adjust downwards in tandem with the interest. in the long run, housing still remains weak. Individual home builders say it’s too soon to know when conditions will begin to pick up again. On Tuesday, the NAHB reported that its index of builder confidence fell in September to the lowest level on record! At an investor conference on Tuesday, Robert Toll, Chairman of Toll brothers (TOL) said its too early to call a bottom just because of the rate cut. Ultimately, the governors have provided a much needed psycological boost for consumers and investors but housing fundamentals still remain weak.

So giddy up Uncle Ben, but be careful of the “moral hazard”. This is a condition economists attribute to chopping away at the rates too quickly which would lead to a re-pricing of risk and consequently incubate favorable conditions that led to this credit squeeze.