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Biggest reversal of course since 2001

The New York Times Dealbook, a blog edited by Andrew Ross Sorkin, was among the first to react to the Fed’s announcement that they would lower interest rates by half a percent and also lower the discount rate by an identical amount. Dealbook noticed a dramatic surge in stocks as investors reacted by sending the Dow up several hundred points shortly after the announcement. “Stocks immediately soared. The Dow Jones industrial average had been up about 75 points shortly before the announcement at 2:15 p.m., and within minutes it was up more than 200 points for the day.”

They noted that “this was the Federal Reserve’s first rate cut in four years, and its most abrupt reversal of course since January 2001.” The post drew comparisons with the last time the Fed was forced to cut rates, they declared “as in 2001, the Fed’s move today came after a panic in financial markets and the collapse of a speculative bubble.” However, the post also clarified the difference between these two instances. In 2001 rates were lowered due to the stock market crash after the dot-com bubble burst, while “this time, the panic is in credit markets spooked by dubious mortgages on inflated housing prices.”

The post acknowledged that this must have been a tricky decision for Bernanke & Co and emphasized a certain tight-rope mentality due to the risks associated with either cutting rates too much or not enough. “If policy makers cut rates too cautiously, they risked a recession; if they cut them too much or too early, they risked stoking inflation.”

Bernanke blinked

The Big Picture is a widely-read business blog written by Barry Ritholtz- the chief market strategist for an institutional research firm and the fund manager of a New York-based hedge fund. Ritholtz declared that he (and many others) were surprised by the Fed’s bold move to lower interest rates by 50 base points. Ritholtz observed that investors are obviously pleased by the news by stating that the “market's loved the ‘shock & awe,’ with the Dow rallying near 300 points on the session.”

Ritholtz also used the post as a chance to give investors some advice about where he thinks the long-term values are considering this latest rate cut. He declared, “as to the Dollar, Oil, Gold, soft commodities: We're long them all ('cepting the greenback) through one asset class or another.”

Additionally, Ritholtz believed that the Fed now has a new problem to deal with as “they have become Wall Street’s b*tch.” He declared that Bernanke’s acquiescence to what the market was asking for could prove to be a thorn in their side. Ritholtz stated that “they may find that's a difficult condition to wriggle out from.”

Interest Rates could go even lower

A post by Eli Hoffman, the editor of Seeking Alpha’s US Market blog, indicated that he was surprised by Bernanke’s decision to cut interest rates by 50 basis points. He declared “economists, who had largely expected a 25 basis-point cut, were surprised by the boldness of the move -- the first rate cut by Chairman Ben Bernanke, who is generally considered moderate.”

Hoffman also ventured a guess that due to the wording used by the Fed during the announcement, that there could be an additional rate cut in the future, should the market require it. He said, “the Fed's willingness to move boldly despite limited evidence of a broad-based economic slowdown, coupled with its readiness to ‘act as needed to foster price stability,’ fuelled hopes of further cuts in coming months.”

The post also quoted the opinions of several leading analysts. Hoffman quoted Pimco CIO Bill Gross saying, in reference to the rate cut, “they’re on a downward path now. The question nobody knows is: how far do they go?”

Hoffman also spoke to Scott Minerd of Guggeinheim Partners who stated that “the Fed’s willingness to reverse its position so drastically over the course of 45 days, from a vigilant stance against inflation to promoting growth, ‘raises serious issues’ over the Fed’s credibility as an inflation fighter.”

Christmas in September

In a post from The Kirk Report, an expert investment blog written by Charles Kirk, it was noted that market activity is up in virtually every sector thanks to Fed Chairman Ben Bernanke’s rate cut. According to Kirk, “Bernanke & Co. decided that the way to solve our economic problems is by lowering interest rates more than expected.” Kirk also reported that “as I write this, only two stocks within my stock screen machine are lower and money is being put to work aggressively across the board.”

Kirk seemed somewhat guarded in his enthusiasm over the extent of the rate cut and he even went so far as to speculate that “arguments like ‘what does the Fed know that we don't know’ will fester.” He also stated that this was “the most closely watched Fed meeting in modern history.”

Charles Kirk also speculated that the reduced interest rate cuts could see the American stock markets hit new highs. He predicted that “the markets make another climb to new all-time highs,” shortly before he declared that “at this pace- we’ll see them before the end of the month.”

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