Throughout the week, Clay Risen, the managing editor of Democracy, will be covering economic developments for us on The Plank.
Strange times, strange times. The big investment banks all predict the Fed will slash interest rates by 100 basis points. Then Bernanke & Co. holds the cut to just 75 basis points. The market goes wild, ending on a huge upswing. As the kids say, WTF?
Of course, no one expects this is anything but another dead-cat bounce. As Leo Kamp, chief economist at financial services company TIAA-CREF, told the Financial Times this morning, "The pattern we have seen in the past will repeat with an initial rally and then earnings reports showing that risks in the economy are still there starting to resonate, and you won't get even much of an uplift going forward and perhaps you will get declines." So traders, don't climb off the roof ledges just yet.
But the surge raises an important question: How many times can a dead cat bounce? Or, to put it a different way, how many more times can Bernanke cut interest rates? In its message announcing the cut, the Fed implied that a heightened inflation risk was part of its decision to go below market expectations on the cut, and two of the hawkiest of the inflation hawks on the committee voted against the move anyway. That said, it also left the door wide open to new cuts down the road. The spread between how many are possible and how many are necessary is a matter weighing on many minds this morning.
That said, serious thinkers don't believe that the answer to all our woes lies in rate cuts anyway. The economy cannot simply be jumpstarted. There are simply way too many empty houses out there, way too many bad mortgages, way too many overexposed banks, way too many accumulated bad decisions for things to turn around so simply.