Fed Discount Rate Cut Means Little

The surprise move by the US Federal Reserve Bank to cut the Fed Discount Rate by half a percentage point on Friday helped to rally the stock market but actually is more of a symbolic move than one that will improve financial market liquidity.

The Fed cut the discount rate in order to bolster confidence among investors and as an effort to restore orderly trading conditions in the stock market, but the Fed Discount Rate cut has no meaningful action on the commercial paper market. Michael Englund, principal director and chief economist with Action Economics LLC. had this to say. “A liquidity crisis is what’s underlying the commercial paper crunch,” Englund said, “and commercial paper doesn’t have access to the discount loans.”

Those stock market investors who were cheering the Fed’s move on Friday will likely be under pressure again by as early as next week. It will take far more than a symbolic gesture to repair damage already caused by a liquidity crunch that is positioned to become far worse.

The US Dollar sold off as Wall Street rallied. Look for additional Dollar strength as the sell off in stocks begins again in the days ahead. The dollar’s strength may seem strange to some in light of the US list of financial market, fiscal and trade deficit problems.

The perverted nature of this Dollar strength is discussed in a posting called Dollar Strength Forecast.

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