Wednesday, October 31, 2007

What Is Wrong With This Picture?

The Fed cut the Fed Funds rate by 25 bps (basis points) to 4.5% this afternoon as expected. It also cut the discount rate by 25 bps to 5%. See the following from CNN.Money:

The Federal Reserve lowered the target for a critical short-term interest rate by a quarter of a point Wednesday, citing continued concerns about weakness in the housing market.

But the Fed indicated that it is also worried about inflation, a sign that the central bank may be reluctant to cut rates again at its next meeting in December. . . . .

. . . . "Housing will continue to be a drag," said Thomas di Galoma, head of U.S. Treasury trading with Jefferies & Co.

"If the Fed sees weaker housing data, they probably will drop rates another quarter point later this year. In the back of everyone's mind, people are wondering how will banks and brokers come out of this. Those fears are not going away overnight," di Galoma added.

So far so good. Right?

As you might expect oil is up to an all time high of $96/barrel, gold is up to $796/oz., and the dollar hits an all time low against the euro of $1.45/euro. All this basically says the dollar is becoming worth less as time goes on.

So why is the stock market up?

By the end of the day the DJIA is up 137 points (+1.00%), the S&P 500 is up 18.36 points (+1.20%) and NASDAQ is up 42.41 points (+1.51%).

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