What If The Fed Gave A Party And Nobody Came?

The thought on the minds of investors since the Fed cut interest rates last week was "Why there isn't a stronger reaction?" The answer of course was that the cut was too late. The Fed waited until it could see the statistics reflect a slow down. By definition, that means that we have already started moving downhill by the time the numbers show up on their radar screen.

Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.

Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.

So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.