Fed Finally Showing Rate Cuts Aren’t Everything

I know they cut 75 basis points at today’s meeting, but the 400+ point gain in the Dow probably isn’t in reaction to more rate cuts. Many people have made the argument, myself included, that rate cuts are not the magic anecdote for our economic problems. Sure they’re nice, but the structural issues we are dealing with cannot be solved by simply lowering the Fed Funds rate.

Recent steps by the Fed show that they realize they can and need to do more to help. Things like opening the discount window to investment banks, not just commercial banks, and backing the first $30 billion of liabilities to help avert a Bear Stearns (BSC) bankruptcy are doing a great job in restoring confidence to the market. I would not be surprised to see them take another step and start buying mortgage backed securities from the likes of Fannie Mae (FNM) to ensure orderly markets for bonds backed by the U.S. government. Fannie bonds are trading well below par despite the fact that they have no default risk.

Do the Fed’s recent actions mean we are completely out of the woods? Of course not. We have gained some footing over the last week or so by holding the closing lows of 1270 on the S&P 500. Even more positive, we are seeing the market react well to bad news, a good indicator that a lot of terrible news has already been priced into stock prices.

Even though JPMorgan (JPM) accounted for the gains (making the feat less impressive), the Dow finished up on Monday, the day the fifth largest investment bank narrowly avoided going belly up. Good news has been hard to come by, but today marks the second 400 point daily Dow gain since last week. Remember, since markets are forward-looking, news itself is far less important than the market’s reaction to it. On that front things are looking up, at least for now, although we all know the trend can change on a dime.

Full Disclosure: No positions in BSC, FNM, or JPM at the time of writing