Catching up with the Fed’s Thinking

Lesso_20070819The WSJ has what appears to be an "All Fed, All the Time" edition out this morning. A combination of articles does a very good job explaining how the financial system came to this point in time, what the Fed’s role is in resolving this as well as past crises, and what risks still face the market. The four articles noted give you all the details.

As we have noted in the past, Fed Chair Ben Bernanke has been stuck with the thankless task of cleaning up after Alan Greenspan. The cut to the discount window rate is merely the first step.

I see the Fed trying to accomplish three primary tasks:

• Restore Investor Psychology
• Fix the seized up liquidity
• Cushion the blows to a slowing economy

Believe it or not, those items are the easy part. Where the complication comes from is trying to accomplish the above while simultaneously avoiding:

Rekindling inflation
• Resurrecting the Greenspan Put (i.e., "Moral Hazard")
• Preventing a meltdown in the US Dollar

These are real policy difficulties that may be beyond any mortal’s ability to control. When the Fed cuts their funds rate from 5.25% to 5.0% in the upcoming September FOMC meeting, we will get the first read on well they can maintain this balancing act…

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Sources:

How a Panicky Day Led the Fed to Act
RANDALL SMITH in New York, CARRICK MOLLENKAMP in London, JOELLEN PERRY in Frankfurt and GREG IP in Washington
WSJ, August 20, 2007; Page A1
http://online.wsj.com/article/SB118755980713302186.html

Lessons of Past May Offer Clues To Market’s Fate
E.S. BROWNING
WSJ, August 20, 2007; Page A1
http://online.wsj.com/article/SB118756974903802456.html

The Fed’s Job
BRIAN S. WESBURY
WSJ, August 20, 2007; Page A11
http://online.wsj.com/article/SB118757483274002562.html

Credit, Profit Woes May Hit Stocks Even if Fed Acts Fast
PETER A. MCKAY
WSJ, August 20, 2007; Page C1
http://online.wsj.com/article/SB118756183733902284.html

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